e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
|
|
|
þ |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2007, or
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 0-10587
FULTON FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
|
|
|
PENNSYLVANIA
|
|
23-2195389 |
|
|
|
(State or other jurisdiction of
|
|
(I.R.S. Employer |
incorporation or organization)
|
|
Identification No.) |
|
|
|
One Penn Square, P. O. Box 4887, Lancaster, Pennsylvania
|
|
17604 |
|
|
|
(Address of principal executive offices)
|
|
(Zip Code) |
(717) 291-2411
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
|
|
Title of each class
|
|
Name of exchange on which registered |
|
|
|
Common Stock, $2.50 par value
|
|
The NASDAQ Stock Market, LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes
þ No o
Indicate by check mark whether the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer
þ
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller reporting company o |
|
|
|
|
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the voting Common Stock held by non-affiliates of the registrant,
based on the average bid and asked prices on June 30, 2007, the last business day of the
registrants most recently completed second fiscal quarter, was approximately $2.4 billion. The
number of shares of the registrants Common Stock outstanding on January 31, 2007 was 173,637,000.
Portions of the Definitive Proxy Statement of the Registrant for the Annual Meeting of Shareholders
to be held on April 25, 2008 are incorporated by reference in Part III.
PART I
Item 1. Business
General
Fulton Financial Corporation (the Corporation) was incorporated under the laws of Pennsylvania on
February 8, 1982 and became a bank holding company through the acquisition of all of the
outstanding stock of Fulton Bank on June 30, 1982. In 2000, the Corporation became a financial
holding company as defined in the Gramm-Leach-Bliley Act (GLB Act), which allowed the Corporation
to expand its financial services activities under its holding company structure (See Competition
and Regulation and Supervision). The Corporation directly owns 100% of the common stock of eleven
community banks, two financial services companies and twelve non-bank entities. As of December 31,
2007, the Corporation had approximately 3,680 full-time equivalent employees.
The common stock of Fulton Financial Corporation is listed for quotation on the Global Select
Market of The NASDAQ Stock Market under the symbol FULT. The Corporations internet address is
www.fult.com. Electronic copies of the Corporations 2007 Annual Report on Form 10-K are available
free of charge by visiting the Investor Information section of www.fult.com. Electronic copies of
quarterly reports on Form 10-Q and current reports on Form 8-K are also available at this internet
address. These reports are posted as soon as reasonably practicable after they are electronically
filed with the Securities and Exchange Commission (SEC).
Bank and Financial Services Subsidiaries
The Corporations eleven subsidiary banks are located primarily in suburban or semi-rural
geographical markets throughout a five state region (Pennsylvania, Delaware, Maryland, New Jersey
and Virginia). Pursuant to its super-community banking strategy, the Corporation operates the
banks autonomously to maximize the advantage of community banking and service to its customers.
Where appropriate, operations are centralized through common platforms and back-office functions;
however, decision-making generally remains with the local bank management. The Corporation is
committed to a decentralized operating philosophy; however, in some markets, merging one subsidiary
bank into another subsidiary bank creates operating and marketing efficiencies by leveraging
existing brand awareness over a larger geographic area. In February 2007, the former First
Washington State Bank subsidiary consolidated with The Bank. In May 2007, the former Somerset
Valley Bank subsidiary consolidated with Skylands Community Bank. In July 2007, the former Lebanon
Valley Farmers Bank subsidiary consolidated with Fulton Bank. In addition, during 2007 the
Corporation announced the consolidation of Resource Bank with Fulton Bank, which is expected to
occur in the first quarter of 2008.
The subsidiary banks are located in areas that are home to a wide range of manufacturing,
distribution, health care and other service companies. The Corporation and its banks are not
dependent upon one or a few customers or any one industry, and the loss of any single customer or a
few customers would not have a material adverse impact on any of the subsidiary banks.
Each of the subsidiary banks offers a full range of consumer and commercial banking services in its
local market area. Personal banking services include various checking and savings products,
certificates of deposit and individual retirement accounts. The subsidiary banks offer a variety of
consumer lending products to creditworthy customers in their market areas. Secured loan products
include home equity loans and lines of credit, which are underwritten based on loan-to-value limits
specified in the lending policy. Subsidiary banks also offer a variety of fixed and variable-rate
products, including construction loans and jumbo loans. Residential mortgages are offered through
Fulton Mortgage Company, which operates as a division of each subsidiary bank (except for Resource
Bank, whose Resource Mortgage division reports directly to Fulton Mortgage Company, and The
Columbia Bank, which maintains its own mortgage lending operation). Consumer loan products also
include automobile loans, automobile and equipment leases, credit cards, personal lines of credit
and checking account overdraft protection.
Commercial banking services are provided to small and medium sized businesses (generally with sales
of less than $100 million) in the subsidiary banks market areas. The maximum total lending
commitment to an individual borrower was $33 million at December 31, 2007, which is below the
Corporations regulatory lending limit. Commercial lending options include commercial, financial,
agricultural and real estate loans. Both floating and fixed rate loans are provided, with floating
rate loans generally tied to an index such as the Prime Rate or the London Interbank Offering Rate.
The Corporations commercial lending policy encourages relationship banking and provides strict
guidelines related to customer creditworthiness and collateral requirements. In addition,
construction
3
lending, equipment leasing, credit cards, letters of credit, cash management services
and traditional deposit products are offered to commercial customers.
Through its financial services subsidiaries, the Corporation offers investment management, trust,
brokerage, insurance and investment advisory services in the market areas serviced by the
subsidiary banks.
The Corporations subsidiary banks deliver their products and services through traditional branch
banking, with a network of full service branch offices. Electronic delivery channels include a
network of automated teller machines, telephone banking and online banking through the internet.
The variety of available delivery channels allows customers to access their account information and
perform certain transactions such as transferring funds and paying bills at virtually any hour of
the day.
The following table provides certain information for the Corporations banking and financial
services subsidiaries as of December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Main Office |
|
Total |
|
Total |
|
|
Subsidiary |
|
Location |
|
Assets |
|
Deposits |
|
Branches (1) |
|
|
|
|
(in millions) |
|
|
|
|
Fulton Bank |
|
Lancaster, PA |
|
$ |
6,274 |
|
|
$ |
3,934 |
|
|
|
94 |
|
Delaware National Bank |
|
Georgetown, DE |
|
|
458 |
|
|
|
253 |
|
|
|
12 |
|
FNB Bank,
N.A. |
|
Danville, PA |
|
|
374 |
|
|
|
248 |
|
|
|
10 |
|
Fulton Financial Advisors, N.A. and
Fulton Insurance Services Group, Inc (2) |
|
Lancaster, PA |
|
|
|
|
|
|
|
|
|
|
|
|
Hagerstown Trust Company |
|
Hagerstown, MD |
|
|
505 |
|
|
|
406 |
|
|
|
12 |
|
Lafayette Ambassador Bank |
|
Easton, PA |
|
|
1,389 |
|
|
|
927 |
|
|
|
25 |
|
Resource Bank |
|
Virginia Beach, VA |
|
|
1,480 |
|
|
|
765 |
|
|
|
7 |
|
Skylands Community Bank |
|
Hackettstown, NJ |
|
|
1,246 |
|
|
|
866 |
|
|
|
27 |
|
Swineford National Bank |
|
Hummels Wharf, PA |
|
|
314 |
|
|
|
208 |
|
|
|
7 |
|
The Bank |
|
Woodbury, NJ |
|
|
1,971 |
|
|
|
1,447 |
|
|
|
50 |
|
The Columbia Bank |
|
Columbia, MD |
|
|
1,783 |
|
|
|
1,068 |
|
|
|
26 |
|
The Peoples Bank of Elkton |
|
Elkton, MD |
|
|
124 |
|
|
|
94 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Remote service facilities (mainly stand-alone automated teller machines)
are excluded. See additional information in Item 2. Properties. |
|
(2) |
|
Dearden, Maguire, Weaver and Barrett LLC, an investment management and
advisory company, is a wholly owned subsidiary of Fulton Financial Advisors,
N.A. |
Non-Bank Subsidiaries
The Corporation owns 100% of the common stock of six non-bank subsidiaries which are consolidated
for financial reporting purposes: (i) Fulton Reinsurance Company, LTD, which engages in the
business of reinsuring credit life and accident and health insurance directly related to extensions
of credit by the banking subsidiaries of the Corporation; (ii) Fulton Financial Realty Company,
which holds title to or leases certain properties upon which Corporation branch offices and other
facilities are located; (iii) Central Pennsylvania Financial Corp., which owns certain limited
partnership interests in partnerships invested in low and moderate income housing projects; (iv)
FFC Management, Inc., which owns certain investment securities and other passive investments; (v)
Virginia Financial Services, LLC, which engages in business consulting activities; and (vi) FFC
Penn Square, Inc. which owns $44.0 million of trust preferred securities issued by a subsidiary of
the Corporations largest bank subsidiary.
4
The Corporation owns 100% of the common stock of six non-bank subsidiaries which are not
consolidated for financial reporting purposes. The following table provides information for these
non-bank subsidiaries, whose sole assets consist of junior subordinated deferrable interest
debentures issued by the Corporation, as of December 31, 2007:
|
|
|
|
|
Subsidiary |
|
State of Incorporation |
|
Total Assets (in thousands) |
Fulton Capital Trust I |
|
Pennsylvania |
|
$154,640 |
SVB Bald Eagle Statutory Trust I |
|
Connecticut |
|
4,124 |
Columbia Bancorp Statutory Trust |
|
Delaware |
|
6,186 |
Columbia Bancorp Statutory Trust II |
|
Delaware |
|
4,124 |
Columbia Bancorp Statutory Trust III |
|
Delaware |
|
6,186 |
PBI Capital Trust |
|
Delaware |
|
10,310 |
Competition
The banking and financial services industries are highly competitive. Within its geographical
region, the Corporations subsidiaries face direct competition from other commercial banks, varying
in size from local community banks to larger regional and national banks, credit unions and
non-bank entities. With the growth in electronic commerce and distribution channels, the banks also
face competition from banks that do not have a physical presence in the Corporations geographical
markets.
The competition in the industry is also highly competitive due to the GLB Act. Under the GLB Act,
banks, insurance companies or securities firms may affiliate under a financial holding company
structure, allowing expansion into non-banking financial services activities that were previously
restricted. These include a full range of banking, securities and insurance activities, including
securities and insurance underwriting, issuing and selling annuities and merchant banking
activities. While the Corporation does not currently engage in all of these activities, the ability
to do so without separate approval from the Federal Reserve Board (FRB) enhances the ability of the
Corporation and financial holding companies in general to compete more effectively in all areas
of financial services.
As a result of the GLB Act, there is a great deal of competition for customers that were
traditionally served by the banking industry. While the GLB Act increased competition, it also
provided opportunities for the Corporation to expand its financial services offerings, such as
insurance products, through Fulton Insurance Services Group, Inc. The Corporation also competes
through the variety of products that it offers and the quality of service that it provides to its
customers. However, there is no guarantee that these efforts will insulate the Corporation from
competitive pressure, which could impact its pricing decisions for loans, deposits and other
services and could ultimately impact financial results.
Market Share
Although there are many ways to assess the size and strength of banks, deposit market share
continues to be an important industry statistic. This publicly available information is compiled,
as of June 30th of each year, by the Federal Deposit Insurance Corporation (FDIC). The
Corporations banks maintain branch offices in 49 counties across five states. In ten of these
counties, the Corporation ranked in the top three in deposit market share (based on deposits as of
June 30, 2007). The following table summarizes information about the counties in which the
Corporation has branch offices and its market position in each county.
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No. of Financial |
|
|
|
|
|
|
|
|
|
|
|
|
Institutions |
|
Deposit Market Share |
|
|
|
|
Population |
|
Banking |
|
Banks/ |
|
Credit |
|
(6/30/07) |
County |
|
State |
|
(2007 Est.) |
|
Subsidiary |
|
Thrifts |
|
Unions |
|
Rank |
|
% |
Lancaster |
|
PA |
|
|
496,000 |
|
|
Fulton Bank |
|
20 |
|
13 |
|
1 |
|
20.2% |
Berks |
|
PA |
|
|
403,000 |
|
|
Fulton Bank |
|
22 |
|
12 |
|
8 |
|
3.5% |
Bucks |
|
PA |
|
|
628,000 |
|
|
Fulton Bank |
|
34 |
|
14 |
|
14 |
|
2.1% |
Centre |
|
PA |
|
|
142,000 |
|
|
Fulton Bank |
|
15 |
|
4 |
|
19 |
|
0.1% |
Chester |
|
PA |
|
|
485,000 |
|
|
Fulton Bank |
|
43 |
|
5 |
|
16 |
|
1.4% |
Columbia |
|
PA |
|
|
65,000 |
|
|
FNB Bank, N.A. |
|
7 |
|
|
|
6 |
|
4.7% |
Cumberland |
|
PA |
|
|
226,000 |
|
|
Fulton Bank |
|
22 |
|
7 |
|
14 |
|
1.5% |
Dauphin |
|
PA |
|
|
255,000 |
|
|
Fulton Bank |
|
18 |
|
8 |
|
8 |
|
4.2% |
Delaware |
|
PA |
|
|
557,000 |
|
|
Fulton Bank |
|
43 |
|
17 |
|
42 |
|
0.2% |
Lebanon |
|
PA |
|
|
127,000 |
|
|
Fulton Bank |
|
10 |
|
2 |
|
1 |
|
28.4% |
Lehigh |
|
PA |
|
|
337,000 |
|
|
Lafayette Ambassador Bank |
|
21 |
|
13 |
|
8 |
|
3.8% |
Lycoming |
|
PA |
|
|
118,000 |
|
|
FNB Bank, N.A. |
|
12 |
|
10 |
|
16 |
|
0.7% |
Montgomery |
|
PA |
|
|
781,000 |
|
|
Fulton Bank |
|
47 |
|
24 |
|
36 |
|
0.2% |
Montour |
|
PA |
|
|
18,000 |
|
|
FNB Bank, N.A. |
|
4 |
|
3 |
|
1 |
|
26.9% |
Northampton |
|
PA |
|
|
294,000 |
|
|
Lafayette Ambassador Bank |
|
19 |
|
13 |
|
3 |
|
14.4% |
Northumberland |
|
PA |
|
|
92,000 |
|
|
Swineford National Bank |
|
18 |
|
3 |
|
14 |
|
1.8% |
|
|
|
|
|
|
|
|
FNB Bank, N.A. |
|
|
|
|
|
9 |
|
4.8% |
Schuylkill |
|
PA |
|
|
147,000 |
|
|
Fulton Bank |
|
19 |
|
5 |
|
8 |
|
3.7% |
Snyder |
|
PA |
|
|
38,000 |
|
|
Swineford National Bank |
|
9 |
|
|
|
1 |
|
29.3% |
Union |
|
PA |
|
|
44,000 |
|
|
Swineford National Bank |
|
8 |
|
1 |
|
6 |
|
5.6% |
York |
|
PA |
|
|
418,000 |
|
|
Fulton Bank |
|
18 |
|
18 |
|
4 |
|
9.4% |
New Castle |
|
DE |
|
|
530,000 |
|
|
Delaware National Bank |
|
33 |
|
24 |
|
25 |
|
0.1% |
Sussex |
|
DE |
|
|
183,000 |
|
|
Delaware National Bank |
|
17 |
|
4 |
|
7 |
|
0.8% |
Baltimore |
|
MD |
|
|
795,000 |
|
|
The Columbia Bank |
|
44 |
|
18 |
|
23 |
|
1.0% |
Baltimore City |
|
MD |
|
|
632,000 |
|
|
The Columbia Bank |
|
41 |
|
17 |
|
22 |
|
0.4% |
Cecil |
|
MD |
|
|
101,000 |
|
|
Peoples Bank of Elkton |
|
8 |
|
3 |
|
5 |
|
9.2% |
Frederick |
|
MD |
|
|
227,000 |
|
|
The Columbia Bank |
|
16 |
|
2 |
|
15 |
|
0.6% |
Howard |
|
MD |
|
|
274,000 |
|
|
The Columbia Bank |
|
22 |
|
3 |
|
2 |
|
13.6% |
Montgomery |
|
MD |
|
|
939,000 |
|
|
The Columbia Bank |
|
38 |
|
21 |
|
33 |
|
0.3% |
Prince Georges |
|
MD |
|
|
856,000 |
|
|
The Columbia Bank |
|
22 |
|
21 |
|
14 |
|
1.5% |
Washington |
|
MD |
|
|
145,000 |
|
|
Hagerstown Trust Company |
|
12 |
|
3 |
|
2 |
|
20.5% |
Atlantic |
|
NJ |
|
|
276,000 |
|
|
The Bank |
|
17 |
|
6 |
|
16 |
|
0.8% |
Camden |
|
NJ |
|
|
522,000 |
|
|
The Bank |
|
24 |
|
9 |
|
15 |
|
1.2% |
Gloucester |
|
NJ |
|
|
283,000 |
|
|
The Bank |
|
23 |
|
4 |
|
2 |
|
12.7% |
Hunterdon |
|
NJ |
|
|
132,000 |
|
|
Skylands Community Bank |
|
17 |
|
3 |
|
14 |
|
1.5% |
Mercer |
|
NJ |
|
|
370,000 |
|
|
The Bank |
|
27 |
|
19 |
|
15 |
|
1.6% |
Middlesex |
|
NJ |
|
|
799,000 |
|
|
Skylands Community Bank |
|
47 |
|
26 |
|
47 |
|
0.1% |
Monmouth |
|
NJ |
|
|
640,000 |
|
|
The Bank |
|
28 |
|
9 |
|
24 |
|
0.8% |
Morris |
|
NJ |
|
|
496,000 |
|
|
Skylands Community Bank |
|
35 |
|
10 |
|
15 |
|
1.4% |
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No. of Financial |
|
|
|
|
|
|
|
|
|
|
|
|
Institutions |
|
Deposit Market Share |
|
|
|
|
Population |
|
Banking |
|
Banks/ |
|
Credit |
|
(6/30/07) |
County |
|
State |
|
(2007 Est.) |
|
Subsidiary |
|
Thrifts |
|
Unions |
|
Rank |
|
% |
Ocean |
|
NJ |
|
|
569,000 |
|
|
The Bank |
|
25 |
|
6 |
|
16 |
|
0.9% |
Salem |
|
NJ |
|
|
67,000 |
|
|
The Bank |
|
8 |
|
4 |
|
1 |
|
31.7% |
Somerset |
|
NJ |
|
|
326,000 |
|
|
Skylands Community Bank |
|
29 |
|
8 |
|
9 |
|
3.4% |
Sussex |
|
NJ |
|
|
155,000 |
|
|
Skylands Community Bank |
|
14 |
|
1 |
|
12 |
|
0.8% |
Warren |
|
NJ |
|
|
112,000 |
|
|
Skylands Community Bank |
|
13 |
|
3 |
|
2 |
|
11.3% |
Chesapeake |
|
VA |
|
|
221,000 |
|
|
Resource Bank |
|
14 |
|
6 |
|
14 |
|
1.4% |
Fairfax |
|
VA |
|
|
1,026,000 |
|
|
Resource Bank |
|
39 |
|
15 |
|
23 |
|
0.3% |
Henrico |
|
VA |
|
|
288,000 |
|
|
Resource Bank |
|
23 |
|
10 |
|
24 |
|
0.2% |
Newport News |
|
VA |
|
|
181,000 |
|
|
Resource Bank |
|
12 |
|
7 |
|
10 |
|
0.9% |
Richmond City |
|
VA |
|
|
193,000 |
|
|
Resource Bank |
|
16 |
|
15 |
|
12 |
|
0.4% |
Virginia Beach |
|
VA |
|
|
440,000 |
|
|
Resource Bank |
|
16 |
|
8 |
|
6 |
|
6.6% |
Supervision and Regulation
The Corporation operates in an industry that is subject to various laws and regulations that are
enforced by a number of Federal and state agencies. Changes in these laws and regulations,
including interpretation and enforcement activities, could impact the cost of operating in the
financial services industry, limit or expand permissible activities or affect competition among
banks and other financial institutions. The Corporation cannot predict the changes in laws and
regulations that might occur, however, it is likely that the current high level of enforcement and
compliance-related activities of Federal and state authorities will continue or potentially
increase.
The following discussion summarizes the current regulatory environment for financial holding
companies and banks, including a summary of the more significant laws and regulations.
Regulators The Corporation is a registered financial holding company, and its subsidiary
banks are depository institutions whose deposits are insured by the FDIC. The Corporation and its
subsidiaries are subject to various regulations and examinations by regulatory authorities. The
following table summarizes the charter types and primary regulators for each of the Corporations
subsidiary banks.
|
|
|
|
|
|
|
|
|
Subsidiary |
|
Charter |
|
Primary
Regulator(s) |
Fulton Bank |
|
PA |
|
PA/FDIC |
Delaware National Bank |
|
National |
|
OCC (1) |
FNB Bank, N.A. |
|
National |
|
OCC |
Fulton Financial Advisors, N.A. |
|
National (2) |
|
OCC |
Fulton Financial (Parent Company) |
|
N/A |
|
FRB |
Hagerstown Trust Company |
|
MD |
|
MD/FDIC |
Lafayette Ambassador Bank |
|
PA |
|
PA/FRB |
Resource Bank |
|
VA |
|
VA/FRB |
Skylands Community Bank |
|
NJ |
|
NJ/FDIC |
Swineford National Bank |
|
National |
|
OCC |
The Bank |
|
NJ |
|
NJ/FDIC |
The Columbia Bank |
|
MD |
|
MD/FDIC |
The Peoples Bank of Elkton |
|
MD |
|
MD/FDIC |
|
|
|
(1) |
|
Office of the Comptroller of the Currency. |
|
(2) |
|
Fulton Financial Advisors, N.A. is chartered as an
uninsured national trust bank. |
7
Federal statutes that apply to the Corporation and its subsidiaries include the GLB Act, the Bank
Holding Company Act (BHCA), the Federal Reserve Act and the Federal Deposit Insurance Act, among
others. In general, these statutes and related interpretations establish: the eligible business
activities of the Corporation; certain acquisition and merger restrictions; limitations on
intercompany transactions such as loans and dividends; and capital adequacy requirements, among
other statutes and regulations.
The Corporation is subject to regulation and examination by the FRB, and is required to file
periodic reports and to provide additional information that the FRB may require. In addition, the
FRB must approve certain proposed changes in organizational structure or other business activities
before they occur. The BHCA imposes certain restrictions upon the Corporation regarding the
acquisition of substantially all of the assets of or direct or indirect ownership or control of,
any bank of which it is not already the majority owner.
Capital Requirements There are a number of restrictions on financial and bank holding
companies and FDIC-insured depository subsidiaries that are designed to minimize potential loss to
depositors and the FDIC insurance funds. If an FDIC-insured depository subsidiary is
undercapitalized, the bank holding company is required to ensure (subject to certain limits) the
subsidiarys compliance with the terms of any capital restoration plan filed with its appropriate
banking agency. Also, a bank holding company is required to serve as a source of financial strength
to its depository institution subsidiaries and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. Under the BHCA, the FRB has the
authority to require a bank holding company to terminate any activity or to relinquish control of a
non-bank subsidiary upon the FRBs determination that such activity or control constitutes a
serious risk to the financial soundness and stability of a depository institution subsidiary of the
bank holding company.
Bank holding companies are required to comply with the FRBs risk-based capital guidelines that
require a minimum ratio of total capital to risk-weighted assets of 8%. At least half of the total
capital is required to be Tier 1 capital. In addition to the risk-based capital guidelines, the FRB
has adopted a minimum leverage capital ratio under which a bank holding company must maintain a
level of Tier 1 capital to average total consolidated assets of at least 3% in the case of a bank
holding company which has the highest regulatory examination rating and is not contemplating
significant growth or expansion. All other bank holding companies are expected to maintain a
leverage capital ratio of at least 1% to 2% above the stated minimum.
Dividends and Loans from Subsidiary Banks There are also various restrictions on the
extent to which the Corporation and its non-bank subsidiaries can receive loans from its banking
subsidiaries. In general, these restrictions require that such loans be secured by designated
amounts of specified collateral and are limited, as to any one of the Corporation or its non-bank
subsidiaries, to 10% of the lending banks regulatory capital (20% in the aggregate to all such
entities).
The Corporation is also limited in the amount of dividends that it may receive from its subsidiary
banks. Dividend limitations vary, depending on the subsidiary banks charter and whether or not it
is a member of the Federal Reserve System. Generally, subsidiaries are prohibited from paying
dividends when doing so would cause them to fall below the regulatory minimum capital levels.
Additionally, limits exist on paying dividends in excess of net income for specified periods. See
Note J Regulatory Matters in the Notes to Consolidated Financial Statements for additional
information regarding regulatory capital and dividend and loan limitations.
Federal Deposit Insurance Substantially all of the deposits of the Corporations
subsidiary banks are insured up to the applicable limits by the Bank Insurance Fund (BIF) of the
FDIC, generally up to $100,000 per insured depositor and up to $250,000 for retirement accounts.
The subsidiary banks pay deposit insurance premiums to the FDIC based on an assessment rate
established by the FDIC for Bank Insurance Fund member institutions. The FDIC has established a
risk-based assessment system under which institutions are classified and pay premiums according to
their perceived risk to the federal deposit insurance funds. The FDIC is not required to charge
deposit insurance premiums when the ratio of deposit insurance reserves to insured deposits is
maintained above specified levels. Since 1997, the Corporations subsidiary banks (based on the
FDICs classification system), had not paid any premiums as the BIF was sufficiently funded.
However, in 2006, legislation was passed reforming the bank deposit insurance system. The reform
act allowed the FDIC to raise the minimum reserve ratio and allowed eligible insured institutions
an initial one-time credit to be used against premiums due. During 2007, the Corporations
subsidiary banks were assessed insurance premiums, the majority of which were offset by each
affiliates one-time credit. It is likely that premiums will continue to be assessed in the near
term and that the Corporations expense will increase as deposits grow and one-time credits expire.
USA Patriot Act Anti-terrorism legislation enacted under the USA Patriot Act of 2001
(Patriot Act) expanded the scope of anti-money laundering laws and regulations and imposed
significant new compliance obligations for financial institutions, including the
8
Corporations subsidiary banks. These regulations include obligations to maintain appropriate policies,
procedures and controls to detect, prevent and report money laundering and terrorist financing.
Failure to comply with the Patriot Acts requirements could have serious legal, financial and
reputational consequences for the institution. The Corporation has adopted appropriate policies,
procedures and controls to address compliance with the Patriot Act and will continue to revise and
update its policies, procedures and controls to reflect changes required, as necessary.
Sarbanes-Oxley Act of 2002 - The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), which was
signed into law in July 2002, impacts all companies with securities registered under the Securities
Exchange Act of 1934, including the Corporation. Sarbanes-Oxley created new requirements in the
areas of corporate governance and financial disclosure including, among other things, (i) increased
responsibility for Chief Executive Officers and Chief Financial Officers with respect to the
content of filings with the SEC; (ii) enhanced requirements for audit committees, including
independence and disclosure of expertise; (iii) enhanced requirements for auditor independence and
the types of non-audit services that auditors can provide; (iv) accelerated filing requirements for
SEC reports; (v) disclosure of a code of ethics (vi) increased disclosure and reporting obligations
for companies, their directors and their executive officers; and (vii) new and increased civil and
criminal penalties for violations of securities laws. Many of the provisions became effective
immediately, while others became effective as a result of rulemaking procedures delegated by
Sarbanes-Oxley to the SEC.
Section 404 of Sarbanes Oxley requires management to issue a report on the effectiveness of its
internal controls over financial reporting. In addition, the Corporations independent registered
public accountants are required to issue an opinion on the effectiveness of the Corporations
internal control over financial reporting. These reports can be found in Item 8, Financial
Statements and Supplementary Data. Certifications of the Chief Executive Officer and the Chief
Financial Officer as required by Sarbanes-Oxley and the resulting SEC rules can be found in the
Signatures and Exhibits sections.
Item 1A. Risk Factors
An investment in the Corporations common stock involves certain risks, including, among others,
the risks described below. In addition to the other information contained in this report, you
should carefully consider the following risk factors.
Changes in interest rates may have an adverse effect on the Corporations net income.
The Corporation is affected by fiscal and monetary policies of the federal government, including
those of the Federal Reserve Board (FRB), which regulates the national money supply in order to
manage recessionary and inflationary pressures. Among the techniques available to the FRB are
engaging in open market transactions of U.S. Government securities, changing the discount rate and
changing reserve requirements against bank deposits. The use of these techniques may also affect
interest rates charged on loans and paid on deposits.
Net interest income is the most significant component of the Corporations net income, accounting
for approximately 77% of total revenues in 2007. The narrowing of interest rate spreads, the
difference between interest rates earned on loans and investments and interest rates paid on
deposits and borrowings, could adversely affect the Corporations net income and financial
condition. Based on the current interest rate environment and the price sensitivity of customers,
loan demand could continue to outpace the growth of core demand and savings accounts, resulting in
compression of net interest margin. Furthermore, the U. S. Treasury yield curve, which is a plot of
the yields on treasury securities over various maturity terms, was relatively flat, with minimal
differences between long and short-term rates during the majority of 2007, resulting in a negative
impact to the Corporations net interest income and net interest margin. Finally, regional and
local economic conditions as well as fiscal and monetary policies of the federal government,
including those of the FRB, may affect prevailing interest rates. The Corporation cannot predict or
control changes in interest rates.
Changes in economic conditions and the composition of the Corporations loan portfolio could lead
to higher loan charge-offs or an increase in the Corporations provision for loan losses and may
reduce the Corporations net income.
Changes in national and regional economic conditions could impact the loan portfolios of the
Corporations subsidiary banks. For example, an increase in unemployment, a decrease in real estate
values or increases in interest rates, as well as other factors, could weaken the economies of the
communities the Corporation serves. Weakness in the market areas served by the Corporations
subsidiary banks could depress its earnings and consequently its financial condition because:
9
|
|
|
customers may not want or need the Corporations products or services; |
|
|
|
|
borrowers may not be able to repay their loans; |
|
|
|
|
the value of the collateral securing the Corporations loans to borrowers may decline; and |
|
|
|
|
the quality of the Corporations loan portfolio may decline. |
Any of the latter three scenarios could require the Corporation to charge-off a higher percentage
of its loans and/or increase its provision for loan losses, which would reduce its net income.
The second and third scenarios could also result in potential repurchase liability to the
Corporation on residential mortgage loans originated and sold into the secondary market. The
Corporations Resource Bank subsidiary originates a variety of residential products through its
Resource Mortgage Division to meet customer demand. These products include conventional residential
mortgages that meet published guidelines of the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation for sale into the secondary market, which are generally
considered prime loans, and loans that deviate from those guidelines. This latter category of loans
includes loans with higher loan-to-value ratios, loans with no or limited verification of a
borrowers income or net worth stated on the loan application, and loans to borrowers with lower
credit ratings, referred to as FICO scores. The general market for these alternative loan products
across the country has declined as a result of moderating real estate prices, increased payment
defaults by borrowers and increased loan foreclosures. In particular, Resource Bank has experienced
an increase in requests from investors for Resource Bank to repurchase loans sold to those
investors due to claimed loan payment defaults and instances of misrepresentations of borrower
information. These repurchase requests resulted in the Corporation recording charges of
$25.1 million in 2007. These charges reflect losses incurred due to actual and potential
repurchases of residential mortgage loans and home equity loans originated and sold in the
secondary market. The Corporation cannot be assured that additional repurchase requests with
respect to loans originated and sold by Resource Bank will not continue, which may result in
additional related charges, adversely affecting the Corporations net income. The Corporation has
exited the national wholesale residential mortgage business at Resource Bank, which is where most
of these alternative loan products were originated. In addition, the management team from Fulton
Mortgage Company has assumed oversight responsibility for Resource Mortgage. Policies and
procedures, risk management analyses, and all secondary market and underwriting functions have been
centralized, with all operations reporting through Fulton Mortgage Company. Other changes have
occurred in underwriting criteria, including requiring higher loan-to-value loans with certain risk
characteristics to be pre-approved by secondary market investors using their own underwriting
criteria. This pre-approval reduces the early payment default exposure for these loans. Also,
changes in secondary market guidelines, including the elimination of previously purchased mortgage
products, are continuously monitored.
In addition, the amount of the Corporations provision for loan losses and the percentage of loans
it is required to charge-off may be impacted by the overall risk composition of the loan portfolio.
While the Corporation believes that its allowance for loan losses as of December 31, 2007 is
sufficient to cover losses inherent in the loan portfolio on that date, the Corporation may be
required to increase its loan loss provision or charge-off a higher percentage of loans due to
changes in the risk characteristics of the loan portfolio, thereby reducing its net income. A
decrease in real estate values could cause higher loan losses and require higher loan loss
provisions for loans that are secured by real estate.
Fluctuations in the value of the Corporations equity portfolio and/or assets under management by
the Corporations investment management and trust services could have an impact on the
Corporations net income.
At December 31, 2007, the Corporations equity investments consisted of $109.7 million of FHLB and
other government agency stock, $69.4 million of stocks of other financial institutions and $12.6
million of mutual funds and other. The Corporation realized net gains on sales of financial
institutions stocks of $1.8 million in 2007, $7.0 million in 2006 and $5.8 million in 2005. The
value of the securities in the Corporations equity portfolio may be affected by a number of
factors, including factors that impact the performance of the U.S. securities market in general
and, due to the concentration in stocks of financial institutions in the Corporations equity
portfolio, specific risks associated with that sector. Recent declines in the values of financial
institution stocks held in this portfolio may impact the Corporations ability to realize gains in
the future. In addition, if the values of the stocks held in this portfolio continue to decline and
there is an indication that declines are other than temporary, the Corporation may be required to
write-down the values of such stocks in the future, depending on the facts and circumstances
surrounding the decease in the value of each individual financial institutions stock.
10
In addition to the Corporations equity portfolio, the Corporations investment management and
trust services income could be impacted by fluctuations in the securities market. A portion of this
revenue is based on the value of the underlying investment portfolios. If the values of those
investment portfolios decrease, whether due to factors influencing U.S. securities markets in
general, or otherwise, the Corporations revenue could be negatively impacted. In addition, the
Corporations ability to sell its brokerage services is dependent, in part, upon consumers level
of confidence in the outlook for rising securities prices.
If the Corporation is unable to acquire additional banks on favorable terms or if it fails to
successfully integrate or improve the operations of acquired banks, the Corporation may be unable
to execute its growth strategies.
The Corporation has historically supplemented its internal growth with strategic acquisitions of
banks, branches and other financial services companies. There can be no assurance that the
Corporation will be able to complete future acquisitions on favorable terms or that it will be able
to assimilate acquired institutions successfully. In addition, the Corporation may not be able to
achieve anticipated cost savings or operating results associated with acquisitions. Acquired
institutions also may have unknown or contingent liabilities or deficiencies in internal controls
that could result in material liabilities or negatively impact the Corporations ability to
complete the internal control procedures required under federal securities laws, rules and
regulations or by certain laws, rules and regulations applicable to the banking industry.
If the goodwill that the Corporation has recorded in connection with its acquisitions becomes
impaired, it could have a negative impact on the Corporations net income.
Applicable accounting standards require that the purchase method of accounting be used for all
business combinations. Under purchase accounting, if the purchase price of an acquired company
exceeds the fair value of the companys net assets, the excess is carried on the acquirers balance
sheet as goodwill. At December 31, 2007, the Corporation had $624.1 million of goodwill on its
balance sheet. Companies must evaluate goodwill for impairment at least annually. Write-downs of
the amount of any impairment, if necessary, are to be charged to the results of operations in the
period in which the impairment occurs. Based on tests of goodwill impairment conducted to date, the
Corporation has concluded that there has been no impairment, and no write-downs have been recorded.
However, there can be no assurance that future evaluations of goodwill will not result in findings
of impairment.
The competition the Corporation faces is increasing and may reduce the Corporations customer base
and negatively impact the Corporations net income.
There is significant competition among commercial banks in the market areas served by the
Corporations subsidiary banks. In addition, as a result of the deregulation of the financial
industry, the Corporations subsidiary banks also compete with other providers of financial
services such as savings and loan associations, credit unions, consumer finance companies,
securities firms, insurance companies, commercial finance and leasing companies, the mutual funds
industry, full service brokerage firms and discount brokerage firms, some of which are subject to
less extensive regulations than the Corporation is with respect to the products and services they
provide. Some of the Corporations competitors, including certain super-regional and national bank
holding companies that have made acquisitions in its market area, have greater resources than the
Corporation has and, as such, may have higher lending limits and may offer other services not
offered by the Corporation.
The Corporation also experiences competition from a variety of institutions outside its market
areas. Some of these institutions conduct business primarily over the internet and may thus be able
to realize certain cost savings and offer products and services at more favorable rates and with
greater convenience to the customer.
Competition may adversely affect the rates the Corporation pays on deposits and charges on loans,
thereby potentially adversely affecting the Corporations profitability. The Corporations
profitability depends upon its continued ability to successfully compete in the market areas it
serves while achieving its objectives.
The supervision and regulation to which the Corporation is subject can be a competitive
disadvantage.
The Corporation is a registered financial holding company, and its subsidiary banks are depository
institutions whose deposits are insured by the Federal Deposit Insurance Corporation (FDIC). As a
result, the Corporation and its subsidiaries are subject to
11
regulations and examinations by various regulatory authorities. In general, statutes
establish: the eligible business activities for the Corporation; certain acquisition and merger
restrictions; limitations on intercompany transactions such as loans and dividends; capital
adequacy requirements; requirements for anti-money laundering programs and other compliance
matters, among other regulations. The Corporation is extensively regulated under federal and state
banking laws and regulations that are intended primarily for the protection of depositors, federal
deposit insurance funds and the banking system as a whole. Compliance with these statutes and
regulations is important to the Corporations ability to engage in new activities and to consummate
additional acquisitions. In addition, the Corporation is subject to changes in federal and state
tax laws as well as changes in banking and credit regulations, accounting principles and
governmental economic and monetary policies. The Corporation cannot predict whether any of these
changes may adversely and materially affect it. Federal and state banking regulators also possess
broad powers to take supervisory actions, as they deem appropriate. These supervisory actions may
result in higher capital requirements, higher insurance premiums and limitations on the
Corporations activities that could have a material adverse effect on its business and
profitability. While these statutes and regulations are generally designed to minimize potential
loss to depositors and the FDIC insurance funds, they do not eliminate risk, and compliance with
such statutes and regulations increases the Corporations expense, requires managements attention
and can be a disadvantage from a competitive standpoint with respect to non-regulated competitors.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The following table summarizes the Corporations branch properties, by subsidiary bank as of
December 31, 2007. Remote service facilities (mainly stand-alone automated teller machines) are
excluded.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
Subsidiary Bank |
|
Owned |
|
Leased |
|
Branches |
Fulton Bank |
|
|
33 |
|
|
|
61 |
|
|
|
94 |
|
Delaware National Bank |
|
|
9 |
|
|
|
3 |
|
|
|
12 |
|
FNB Bank,
N.A. |
|
|
8 |
|
|
|
2 |
|
|
|
10 |
|
Hagerstown Trust Company |
|
|
6 |
|
|
|
6 |
|
|
|
12 |
|
Lafayette Ambassador Bank |
|
|
8 |
|
|
|
17 |
|
|
|
25 |
|
Resource Bank |
|
|
2 |
|
|
|
5 |
|
|
|
7 |
|
Skylands Community Bank |
|
|
7 |
|
|
|
20 |
|
|
|
27 |
|
Swineford National Bank |
|
|
5 |
|
|
|
2 |
|
|
|
7 |
|
The Bank |
|
|
31 |
|
|
|
19 |
|
|
|
50 |
|
The Columbia Bank |
|
|
5 |
|
|
|
21 |
|
|
|
26 |
|
The Peoples Bank of Elkton |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
115 |
|
|
|
157 |
|
|
|
272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
The following table summarizes the Corporations other significant properties (administrative
headquarters locations generally include a branch; these are also reflected in the preceding
table):
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned/ |
Entity |
|
Property |
|
Location |
|
Leased |
Fulton Financial Corporation |
|
Operations Center |
|
East Petersburg, PA |
|
Owned |
Fulton Bank/Fulton Financial Corporation |
|
Admin. Headquarters |
|
Lancaster, PA |
|
(1) |
Fulton Bank |
|
Operations Center |
|
Mantua, NJ |
|
Owned |
Fulton Bank, Drovers Division |
|
Admin. Headquarters |
|
York, PA |
|
Leased (2) |
Fulton Bank, Great Valley Division |
|
Admin. Headquarters |
|
Reading, PA |
|
Leased (5) |
Fulton Bank, Premier Division |
|
Admin. Headquarters |
|
Doylestown, PA |
|
Owned |
Fulton Bank, Lebanon Division |
|
Admin. Headquarters |
|
Lebanon, PA |
|
Owned |
Delaware National Bank |
|
Admin. Headquarters |
|
Georgetown, DE |
|
Leased (3) |
FNB Bank, N.A |
|
Admin. Headquarters |
|
Danville, PA |
|
Owned |
Hagerstown Trust Company |
|
Admin. Headquarters |
|
Hagerstown, MD |
|
Owned |
Lafayette Ambassador Bank |
|
Admin. Headquarters |
|
Easton, PA |
|
Owned |
Lafayette Ambassador Bank |
|
Operations Center |
|
Bethlehem, PA |
|
Owned |
Lafayette Ambassador Bank |
|
Corp. Service Center |
|
Bethlehem, PA |
|
Leased (6) |
Peoples Bank of Elkton |
|
Admin. Headquarters |
|
Elkton, MD |
|
Owned |
Resource Bank |
|
Admin. Headquarters |
|
Herndon, VA |
|
Owned |
Skylands Community Bank |
|
Admin. Headquarters |
|
Hackettstown, NJ |
|
Leased (4) |
Skylands Community Bank, Somerset Valley Division |
|
Admin. Headquarters |
|
Somerville, PA |
|
Owned |
Swineford National Bank |
|
Admin. Headquarters |
|
Hummels Wharf, PA |
|
Owned |
The Bank |
|
Admin. Headquarters |
|
Woodbury, NJ |
|
Owned |
The Bank, First Washington Division |
|
Admin. Headquarters |
|
Windsor, NJ |
|
Owned |
The Columbia Bank |
|
Admin. Headquarters |
|
Columbia, MD |
|
Leased (7) |
|
|
|
(1) |
|
Includes approximately 100,000 square feet which is owned by an independent third party who
financed the construction through a loan from Fulton Bank. The Corporation is leasing this
space from the third party in an arrangement accounted for as a capital lease. The lease
term expires in 2027. The Corporation owns the remainder of the Administrative Headquarters
location. |
|
(2) |
|
Lease expires in 2013. |
|
(3) |
|
Lease expires in 2011. |
|
(4) |
|
Lease expires in 2009. |
|
(5) |
|
Lease expires in 2016. |
|
(6) |
|
Lease expires in 2017. |
|
(7) |
|
Lease expires in 2013. |
Item 3. Legal Proceedings
There are no legal proceedings pending against Fulton Financial Corporation or any of its
subsidiaries which are expected to have a material impact upon the financial position and/or the
operating results of the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of Fulton Financial Corporation during the
fourth quarter of 2007.
13
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Common Stock
As of December 31, 2007, the Corporation had 173.5 million shares of $2.50 par value common stock
outstanding held by approximately 50,000 holders of record. The common stock of the Corporation is
traded on The NASDAQ Stock Market under the symbol FULT.
The following table presents the quarterly high and low prices of the Corporations common stock
and per-share cash dividends declared for each of the quarterly periods in 2007 and 2006. Per-share
amounts have been retroactively adjusted to reflect the effect of stock dividends and splits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Range |
|
Per-Share |
|
|
High |
|
Low |
|
Dividend |
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
16.81 |
|
|
$ |
14.50 |
|
|
$ |
0.1475 |
|
Second Quarter |
|
|
15.32 |
|
|
|
14.21 |
|
|
|
0.1500 |
|
Third Quarter |
|
|
16.26 |
|
|
|
11.25 |
|
|
|
0.1500 |
|
Fourth Quarter |
|
|
15.02 |
|
|
|
9.91 |
|
|
|
0.1500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
17.35 |
|
|
$ |
16.07 |
|
|
$ |
0.1380 |
|
Second Quarter |
|
|
16.47 |
|
|
|
15.36 |
|
|
|
0.1475 |
|
Third Quarter |
|
|
16.99 |
|
|
|
15.55 |
|
|
|
0.1475 |
|
Fourth Quarter |
|
|
16.88 |
|
|
|
15.65 |
|
|
|
0.1475 |
|
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information about options outstanding under the Corporations 1996
Incentive Stock Option Plan and 2004 Stock Option and Compensation Plan as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
future issuance under |
|
|
|
|
|
|
Number of securities to |
|
Weighted-average |
|
equity compensation |
|
|
|
|
|
|
be issued upon exercise |
|
exercise price of |
|
plans (excluding |
|
|
|
|
|
|
of outstanding options, |
|
outstanding options, |
|
securities reflected in |
|
|
|
|
Plan Category |
|
warrants and rights |
|
warrants and rights |
|
first column) |
|
|
|
|
Equity compensation
plans
approved by
security holders |
|
|
7,709,790 |
|
|
|
$ 13.45 |
|
|
|
14,019,720 |
|
|
|
|
|
Equity compensation
plans not
approved by
security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
7,709,790 |
|
|
|
$ 13.45 |
|
|
|
14,019,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Performance Graph
The graph below shows cumulative investment returns to shareholders based on the assumptions that
(A) an investment of $100.00 was made on December 31, 2002, in each of the following: (i) Fulton
Financial Corporation common stock; (ii) the stock of all U. S. companies traded on The NASDAQ
Stock Market and (iii) common stock of the performance peer group approved by the Board of
Directors on September 21, 2004 consisting of bank and financial holding companies located
throughout the United States with assets between $6-20 billion which were not a party to a merger
agreement as of the end of the period and (B) all dividends were reinvested in such securities over
the past five years. The graph is not indicative of future price performance.
The graph below is furnished under this Part II Item 5 of this Form 10-K and shall not be deemed to
be soliciting material or to be filed with the Commission or subject to Regulation 14A or 14C,
or to the liabilities of Section 18 of the Exchange Act of 1934, as amended.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending December 31 |
Index |
|
2002 |
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
Fulton Financial Corporation |
|
|
100.00 |
|
|
|
134.31 |
|
|
|
154.74 |
|
|
|
150.89 |
|
|
|
155.79 |
|
|
|
109.28 |
|
NASDAQ Composite |
|
|
100.00 |
|
|
|
150.01 |
|
|
|
162.89 |
|
|
|
165.13 |
|
|
|
180.85 |
|
|
|
198.60 |
|
Fulton Financial Peer Group (1) |
|
|
100.00 |
|
|
|
129.13 |
|
|
|
149.78 |
|
|
|
149.36 |
|
|
|
163.25 |
|
|
|
132.14 |
|
|
|
|
(1) |
|
A listing of the Fulton Financial Peer Group is located under the heading
Compensation Disscussion and Analysis within the Corporations 2008 Proxy
Statement. |
Issuer Purchases of Equity Securities
Not Applicable.
15
Item 6. Selected Financial Data
5-YEAR CONSOLIDATED SUMMARY OF FINANCIAL RESULTS
(dollars in thousands, except per-share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
SUMMARY OF INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
939,577 |
|
|
$ |
864,507 |
|
|
$ |
625,767 |
|
|
$ |
493,643 |
|
|
$ |
435,531 |
|
Interest expense |
|
|
450,833 |
|
|
|
378,944 |
|
|
|
213,219 |
|
|
|
135,994 |
|
|
|
131,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
488,744 |
|
|
|
485,563 |
|
|
|
412,548 |
|
|
|
357,649 |
|
|
|
304,437 |
|
Provision for loan losses |
|
|
15,063 |
|
|
|
3,498 |
|
|
|
3,120 |
|
|
|
4,717 |
|
|
|
9,705 |
|
Other income |
|
|
148,024 |
|
|
|
149,875 |
|
|
|
144,298 |
|
|
|
138,864 |
|
|
|
134,370 |
|
Other expenses |
|
|
405,455 |
|
|
|
365,991 |
|
|
|
316,291 |
|
|
|
277,515 |
|
|
|
233,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
216,250 |
|
|
|
265,949 |
|
|
|
237,435 |
|
|
|
214,281 |
|
|
|
195,451 |
|
Income taxes |
|
|
63,532 |
|
|
|
80,422 |
|
|
|
71,361 |
|
|
|
64,673 |
|
|
|
59,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
152,718 |
|
|
$ |
185,527 |
|
|
$ |
166,074 |
|
|
$ |
149,608 |
|
|
$ |
136,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER-SHARE DATA (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (basic) |
|
$ |
0.88 |
|
|
$ |
1.07 |
|
|
$ |
1.01 |
|
|
$ |
0.95 |
|
|
$ |
0.93 |
|
Net income (diluted) |
|
|
0.88 |
|
|
|
1.06 |
|
|
|
1.00 |
|
|
|
0.94 |
|
|
|
0.92 |
|
Cash dividends |
|
|
0.598 |
|
|
|
0.581 |
|
|
|
0.540 |
|
|
|
0.493 |
|
|
|
0.452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATIOS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
1.01 |
% |
|
|
1.30 |
% |
|
|
1.41 |
% |
|
|
1.45 |
% |
|
|
1.55 |
% |
Return on average equity |
|
|
9.98 |
|
|
|
12.84 |
|
|
|
13.24 |
|
|
|
13.98 |
|
|
|
15.23 |
|
Return on average tangible equity (2) |
|
|
18.16 |
|
|
|
23.87 |
|
|
|
20.28 |
|
|
|
18.58 |
|
|
|
17.33 |
|
Net interest margin |
|
|
3.66 |
|
|
|
3.82 |
|
|
|
3.93 |
|
|
|
3.83 |
|
|
|
3.82 |
|
Efficiency ratio |
|
|
61.20 |
|
|
|
56.00 |
|
|
|
55.50 |
|
|
|
55.90 |
|
|
|
54.00 |
|
Average equity to average assets |
|
|
10.10 |
|
|
|
10.10 |
|
|
|
10.60 |
|
|
|
10.30 |
|
|
|
10.20 |
|
Dividend payout ratio |
|
|
68.00 |
|
|
|
54.80 |
|
|
|
54.00 |
|
|
|
52.50 |
|
|
|
49.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PERIOD-END BALANCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
15,923,098 |
|
|
$ |
14,918,964 |
|
|
$ |
12,401,555 |
|
|
$ |
11,160,148 |
|
|
$ |
9,768,669 |
|
Investment securities |
|
|
3,153,552 |
|
|
|
2,878,238 |
|
|
|
2,562,145 |
|
|
|
2,449,859 |
|
|
|
2,927,150 |
|
Loans, net of unearned income |
|
|
11,204,424 |
|
|
|
10,374,323 |
|
|
|
8,424,728 |
|
|
|
7,533,915 |
|
|
|
6,140,200 |
|
Deposits |
|
|
10,105,445 |
|
|
|
10,232,469 |
|
|
|
8,804,839 |
|
|
|
7,895,524 |
|
|
|
6,751,783 |
|
Federal Home Loan Bank advances
and long-term debt |
|
|
1,642,133 |
|
|
|
1,304,148 |
|
|
|
860,345 |
|
|
|
684,236 |
|
|
|
568,730 |
|
Shareholders equity |
|
|
1,574,920 |
|
|
|
1,516,310 |
|
|
|
1,282,971 |
|
|
|
1,244,087 |
|
|
|
948,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE BALANCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
15,090,458 |
|
|
$ |
14,297,681 |
|
|
$ |
11,781,485 |
|
|
$ |
10,348,268 |
|
|
$ |
8,805,554 |
|
Investment securities |
|
|
2,843,478 |
|
|
|
2,869,862 |
|
|
|
2,498,538 |
|
|
|
2,563,143 |
|
|
|
2,569,168 |
|
Loans, net of unearned income |
|
|
10,736,566 |
|
|
|
9,892,082 |
|
|
|
7,981,604 |
|
|
|
6,857,386 |
|
|
|
5,564,806 |
|
Deposits |
|
|
10,222,594 |
|
|
|
9,955,247 |
|
|
|
8,364,435 |
|
|
|
7,285,134 |
|
|
|
6,505,371 |
|
Federal Home Loan Bank advances
and long-term debt |
|
|
1,579,527 |
|
|
|
1,069,868 |
|
|
|
839,694 |
|
|
|
641,154 |
|
|
|
568,706 |
|
Shareholders equity |
|
|
1,530,613 |
|
|
|
1,444,793 |
|
|
|
1,254,476 |
|
|
|
1,069,904 |
|
|
|
895,616 |
|
|
|
|
(1) |
|
Adjusted for stock dividends and stock splits. |
|
(2) |
|
Net income, as adjusted for intangible amortization (net of tax), divided by average
shareholders equity, net of goodwill and intangible assets. |
16
Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Managements Discussion and Analysis of Financial Condition and Results of Operations (Managements
Discussion) concerns Fulton Financial Corporation (the Corporation), a financial holding company
registered under the Bank Holding Company Act and incorporated under the laws of the Commonwealth
of Pennsylvania in 1982, and its wholly owned subsidiaries. Managements Discussion should be read
in conjunction with the consolidated financial statements and other financial information presented
in this report.
FORWARD-LOOKING STATEMENTS
The Corporation has made, and may continue to make, certain forward-looking statements with respect
to acquisition and growth strategies, market risk, the effect of competition and interest rates on
net interest margin and net interest income, investment strategy and income growth, investment
securities gains, other than temporary impairment of investment securities, deposit and loan
growth, asset quality, balances of risk-sensitive assets to risk-sensitive liabilities, salaries
and employee benefits and other expenses, amortization of intangible assets, goodwill impairment,
capital and liquidity strategies and other financial and business matters for future periods. The
Corporation cautions that these forward-looking statements are subject to various assumptions,
risks and uncertainties. Because of the possibility that the underlying assumptions may change,
actual results could differ materially from these forward-looking statements. The Corporation
undertakes no obligation to update or revise any forward-looking statements. Accordingly, readers
are cautioned not to place undue reliance on such forward-looking statements.
OVERVIEW
Banking Industry Challenges
There were a number of issues that the industry faced during 2007 and will continue to face in the
coming months and years. While these do not apply to all financial institutions, including the
Corporation, a general understanding of the operating environment for banks is helpful in
understanding the Corporations financial performance in 2007.
|
|
|
Residential Lending Instability in the housing markets, in conjunction with increasing
defaults on mortgage loans and decreasing values of residential real estate, had
repercussions throughout the industry. In addition to the contribution of changes in
economic conditions, defaults were often related to higher-risk subprime or non-prime
loans. Subprime refers to a type of mortgage that is made to borrowers with lower credit
ratings who, therefore, do not qualify for loans with conventional terms, or prime loans.
Rates are typically higher than prime loans to compensate lenders for the increased credit
risk. Non-prime refers to loans that are made to borrowers with credit characteristics that
are between prime and subprime. Other defaults included loans originated with steep
teaser or introductory rates that reset to market rates when the introductory period
expired. |
|
|
|
|
Investment Portfolios Certain investment securities are backed by the high-risk
mortgage loans discussed above and the payments on such securities may not be guaranteed by
a government-sponsored agency. As a result of the higher risk, the yields on these
securities are typically higher than agency-guaranteed mortgage-backed securities. In
recent years, these securities increased in popularity as the loans underlying the
securities also became more prevalent. However, as defaults on these loans increased, the
credit quality of the securities also deteriorated and many investors faced increasing
credit losses. |
|
|
|
|
Net Interest Margin While not an issue limited solely to 2007, the interest rate
environment continued to present challenges to banks in maintaining and growing their net
interest margin, or net interest income as a percentage of interest earning assets. The
term interest rate environment generally refers to both the level of interest rates and
the shape of the U. S. Treasury yield curve, which is a plot of the yields on treasury
securities over various maturity terms. Typically, the shape of the yield curve is upward
sloping, with longer-term rates exceeding shorter-term rates. However, the yield curve
continued to be flat during most of 2007, meaning that there was little difference between
the rates on shorter-term financial instruments and those on longer-term instruments. For
banks that depend on shorter-term funding to invest longer term in investment securities or
loans, this situation is not favorable. Beginning in September 2007, the FRB began
implementing a series of decreases in short-term rates to stimulate the economy. |
17
|
|
|
Asset Quality For the past several years, the industry had been operating in an
environment where credit losses and non-performing assets were at historical lows. During
2007, due to a combination of the previously discussed residential mortgage issues and
general economic conditions, the industry began to see a return to higher credit losses and
higher non-performing asset levels. |
|
|
|
|
Capital and Liquidity Losses from subprime lending and general credit issues have
challenged many banks to maintain or grow capital to support their business. In some cases,
banks have lowered or eliminated dividends to shareholders in order to maintain capital. |
These are some of the more significant factors that presented challenges to the industry during
this most recent year. The specific impact to the Corporation of these and other issues are
discussed throughout the Overview and other sections of Managements Discussion, where
appropriate.
Summary Financial Results
As a financial institution with a focus on traditional banking activities, the Corporation
generates the majority of its revenue through net interest income, or the difference between
interest earned on loans and investments and interest paid on deposits and borrowings. Growth in
net interest income is dependent upon balance sheet growth and/or maintaining or increasing the net
interest margin, which is net interest income (fully taxable-equivalent) as a percentage of average
interest-earning assets. The Corporation also generates revenue through fees earned on the various
services and products offered to its customers and through sales of assets, such as loans,
investments, or properties. Offsetting these revenue sources are provisions for credit losses on
loans, operating expenses and income taxes.
The following table presents a summary of the Corporations earnings and selected performance
ratios:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
|
2007 |
|
2006 |
Net income (in thousands) |
|
$ |
152,718 |
|
|
$ |
185,527 |
|
Diluted net income per share |
|
$ |
0.88 |
|
|
$ |
1.06 |
|
Return on average assets |
|
|
1.01 |
% |
|
|
1.30 |
% |
Return on average equity |
|
|
9.98 |
% |
|
|
12.84 |
% |
Return on average tangible equity (1) |
|
|
18.16 |
% |
|
|
23.87 |
% |
Net interest margin (2) |
|
|
3.66 |
% |
|
|
3.82 |
% |
Non-performing assets to total assets |
|
|
0.76 |
% |
|
|
0.39 |
% |
|
|
|
(1) |
|
Calculated as net income, adjusted for intangible
amortization (net of tax), divided by average shareholders equity,
excluding goodwill and intangible assets. |
|
(2) |
|
Presented on a fully taxable-equivalent (FTE) basis,
using a 35% Federal tax rate and statutory interest expense
disallowances. See also Net Interest Income section of
Managements Discussion. |
The Corporations net income for 2007 decreased $32.8 million, or 17.7%, from 2006 due to an
increase in other expenses of $39.5 million, or 10.8%, an increase in the provision for loan losses
of $11.6 million, or 330.6%, and a $1.9 million, or 1.2%, decrease in other income, offset by a
$16.9 million, or 21.0%, decrease in income tax expense and a $3.2 million, or 0.7%, increase in
net interest income.
The increase in other expenses was primarily due to $25.1 million in charges for contingent losses
related to the Corporations mortgage banking operations at Resource Bank (Resource Mortgage). The
increase in the provision for loan losses was due to an increased estimate of losses inherent in
the Corporations loan portfolio, driven in part by an increase in the level of net charge-offs and
non-performing loans in 2007 in comparison to 2006. The decrease in income tax expense was due to a
decrease in income before income taxes in 2007 as well as a decrease in the effective tax rate. The
net interest income increase was driven by average balance sheet growth, partially offset by a 16
basis point decline in net interest margin. Net interest margin decreased as a result of funding
loan growth with borrowings and time deposits as opposed to lower cost core demand and savings
accounts.
Residential Lending Residential mortgages are originated and sold by the Corporation
through three channels: 1) Fulton Mortgage Company (Fulton Mortgage), which is a division of each
of the Corporations subsidiary banks, excluding Resource Bank and The
18
Columbia Bank; 2) The Columbia Bank, which maintains its own mortgage lending operations; and 3) Resource Mortgage, which
is a division of Resource Bank.
Fulton Mortgage primarily originates prime loans that conform to published standards of
government sponsored agencies, including the Federal National Mortgage Association and the Federal
Home Loan Mortgage Corporation. Such loans are typically sold to these agencies, if servicing is
retained by the Corporation, or to other investors, if servicing is released. For loans
underwritten to agency standards, recourse risk or the requirement to repurchase these loans in
the event of borrower default is minimal. A much less significant portion of Fulton Mortgages
volume is originated under other investor programs, which do not conform to agency standards and,
therefore, carry a somewhat higher recourse risk. Depending on balance sheet management decisions,
some originated loans are held in portfolio. These loans would typically be adjustable rate loans,
to minimize interest rate risk.
Total loans sold by Fulton Mortgage in 2007 and 2006 were $425.6 million and $443.3 million,
respectively. Of this volume, less than 10% of total loans sold was
considered to be non-prime for both 2007 and 2006.
There were no losses incurred on loan repurchases by Fulton Mortgage in 2007 or 2006.
The Columbia Bank sold residential mortgages totaling $73.8 million and $99.0 million in 2007 and
2006, respectively. As with Fulton Mortgage, the vast majority of these loans sold were prime loans
that conformed to published standards of government sponsored agencies. There were no losses
incurred on loan repurchases by The Columbia Bank in 2007 or 2006.
Resource Mortgage operated a significant national wholesale mortgage lending operation from the
time the Corporation acquired Resource Bank in 2004 through early 2007. Loans were originated and
sold under various investor programs, including some that allowed for reduced documentation and/or
no verification of certain borrower qualifications, such as income or assets. While few of the
loans originated and sold by Resource Mortgage were considered to be subprime, significant volumes
of non-prime loans were originated and sold. Total loans sold by
Resource Mortgage in 2007 and 2006 were $769.5 million and
$1.4 billion, respectively. Of this volume, less than 15% of
total loans sold in 2007 was considered non-prime, compared to
approximately 40% in 2006.
Loans sold under these non-prime investor programs included standard representations and warranties
regarding the origination of the loans, as well as standard agreements to repurchase loans under
specified circumstances, including early payment defaults by the borrowers or evidence of
misrepresentation of borrower information. During 2007, the general market for these alternative
loan products across the country had declined due to moderating real estate prices, increased
payment defaults by borrowers and increased loan foreclosures. As a result, Resource Mortgage
experienced an increase in requests from secondary market purchasers to repurchase loans sold to
those investors. These repurchase requests resulted in the Corporation recording $25.1 million of
charges during 2007. These charges, included in operating risk loss on the Corporations
consolidated statements of income, represented the write-downs that were necessary to reduce the
loan balances to their estimated net realizable values, based on valuations of the properties, as
adjusted for market factors and other considerations. Operating risk loss consists of losses
incurred during the normal conduct of banking operations. Many of the loans the Corporation
repurchased or that may be repurchased are delinquent and will likely be settled through
foreclosure and sale of the underlying collateral.
19
The following table presents a summary of approximate principal balances and related
reserves/write-downs recognized on the Corporations consolidated balance sheet, by general
category:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Reserves/ |
|
|
|
Principal |
|
|
Write-downs |
|
|
|
(in thousands) |
|
Outstanding repurchase requests (1) (2) |
|
$ |
19,830 |
|
|
$ |
(6,450 |
) |
No repurchase request received sold
loans with identified potential
misrepresentations of borrower
information (1) (2) |
|
|
16,610 |
|
|
|
(6,330 |
) |
Repurchased loans (3) |
|
|
23,700 |
|
|
|
(5,060 |
) |
Foreclosed real estate (OREO) |
|
|
14,360 |
|
|
|
|
|
Other (3) (4) |
|
|
N/A |
|
|
|
(780 |
) |
|
|
|
|
|
|
|
|
Total reserves/write-downs at December 31, 2007 |
|
|
|
|
|
$ |
(18,620 |
) |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Principal balances had not been repurchased and, therefore, are not
included on the consolidated balance sheet as of December 31, 2007. |
|
(2) |
|
Reserve balance included as a component of other liabilities on the
consolidated balance sheet as of December 31, 2007. |
|
(3) |
|
Principal balances, net of write-downs, are included as a component
of loans, net of unearned income on the consolidated balance sheet as of
December 31, 2007. |
|
(4) |
|
During 2007, approximately $30 million of loans held for sale were
reclassified to portfolio because there was no longer an active secondary
market for these types of loans. The write-down amount adjusts these loans to
lower of cost or market upon transfer to portfolio. |
Of the $23.7 million of repurchased loans outstanding as of December 31, 2007, approximately $12
million were classified as non-performing loans, net of write-downs.
The following presents the change in the reserve/write-down balances for the year ended December
31, 2007 (in thousands):
|
|
|
|
|
Total reserves/write-downs, beginning of year |
|
$ |
500 |
|
Additional charges to expense |
|
|
25,100 |
|
Charge-offs |
|
|
(6,980 |
) |
|
|
|
|
Total reserves/write-downs, end of year |
|
$ |
18,620 |
|
|
|
|
|
Included in the $25.1 million of charges recorded in 2007 was $9.9 million of losses for two
unrelated groups of loans totaling $26.6 million for which management identified potential
misrepresentations of borrower information. As of December 31, 2007, the Corporation had received
repurchase requests for $9.4 million of these loans. In addition, $540,000 of these loans were
originated for sale, but later transferred to portfolio.
In order to limit additional losses associated with the potential repurchase of previously
originated and sold residential mortgage loans and home equity loans, the Corporation exited the
national wholesale residential mortgage business at Resource Mortgage, where the majority of the
repurchased loans were generated. In addition, in the third quarter of 2007, Resource Bank,
including Resource Mortgage, began reporting directly to Fulton Bank, and the Corporation intends
to legally merge Resource into Fulton Bank in the first quarter of 2008. See Note A, Significant
Accounting Policies in the Notes to Consolidated Financial Statements for more details of bank
subsidiary consolidations.
During the third quarter of 2007, the Audit Committee of the Corporations Board of Directors
engaged outside counsel to review whether there were additional potentially material occurrences of
misrepresentations of borrower information that should be considered in determining the level of
loss reserves. The investigation involved sampling and analyzing data on loans originated by
Resource Mortgage, examining underlying loan documentation on selected loans identified as a result
of this analysis together with other records of the Corporation, and conducting interviews of
relevant employees. Based on the results of the review, completed in November 2007, the Audit
Committee and management concluded that no changes to the consolidated financial statements were
necessary as of the end of the third quarter of 2007.
20
Management believes that the reserves recorded as of December 31, 2007 for the known Resource
Mortgage issues are adequate, based on the results of the aforementioned review, the assessment of
collateral values and other market factors. However, continued declines in collateral values or the
identification of additional loans to be repurchased could necessitate additional reserves in the
future.
Investment Portfolio The Corporations investment strategy for debt securities has
historically been conservative, to minimize potential credit losses. Mortgage-backed securities and
collateralized mortgage obligations in the portfolio are generally guaranteed by
government-sponsored agencies, minimizing the amount of principal at risk of loss. During 2007, the
Corporation sold $55.8 million of collateralized mortgage obligations, which were not
agency-guaranteed securities, for a total loss of $678,000. As a result of these sales, as of
December 31, 2007, the investment portfolio includes only mortgage-backed securities and
collateralized mortgage obligations whose timely principal payments are guaranteed by
government-sponsored agencies.
Net Interest Margin Changes in the interest rate environment can impact both the
Corporations net interest income and its non-interest income. During 2006 and for a majority of
2007, the yield curve was relatively flat and, at times, downward sloping, with minimal differences
between long and short-term rates, negatively impacting the Corporations net interest income and
net interest margin. During the fourth quarter of 2007, the yield curve began to steepen slightly
as a result of decreases in short-term interest rates. However, for durations of seven years or
less which is the term of the majority of the Corporations interest-earning assets and
interest-bearing liabilities there remained little difference in yields.
The following graph shows the U. S. treasury yield curves at the end of each of the last three
years:
The Corporations net interest margin was negatively impacted due to the Corporation funding loan
growth and investment purchases with higher cost short-term borrowings and time deposits as opposed
to lower cost savings and demand deposits. The Corporation experienced a 38 basis point increase in
the cost of average interest-bearing liabilities (from 3.48% in 2006 to 3.86% in 2007) as compared
to a 20 basis point increase in the yield on average interest-earning assets (from 6.73% in 2006 to
6.93% in 2007). As a result, the net interest margin decreased 16 basis points on an annual basis
and trended downward throughout much of 2006 and 2007, as shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
1st Quarter |
|
|
3.74 |
% |
|
|
3.88 |
% |
2nd Quarter |
|
|
3.70 |
|
|
|
3.90 |
|
3rd Quarter |
|
|
3.62 |
|
|
|
3.85 |
|
4th Quarter |
|
|
3.56 |
|
|
|
3.68 |
|
Year to Date |
|
|
3.66 |
|
|
|
3.82 |
|
21
Floating rate loans, short-term borrowings and savings and time deposit rates are generally
influenced by short-term rates. During 2007, the Federal Reserve Board (FRB) lowered the overnight
borrowing, or Federal funds, rate three times, for a total decrease of 100 basis points since
December 31, 2006, ending 2007 at 4.25%. The Corporations prime lending rate had a corresponding
decrease, from 8.25% to 7.25%, resulting in a decrease in the rates on floating rate loans as well
as the rates on new fixed-rate loans. In addition, the decrease in short-term rates also resulted
in decreased funding costs, with short-term borrowings immediately repricing to lower rates.
Deposit rates also decreased, although to a lesser degree as practical limits exist on how low such
rates can decline before they would no longer be attractive to depositors, relative to rates paid
by competitors of the Corporation. In January 2008, the FRB lowered the Federal funds rate an
additional 125 basis points. The Market Risk section of Managements Discussion summarizes the
expected impact of rate changes on net interest income.
Asset Quality Asset quality refers to the underlying credit characteristics of borrowers
and the likelihood that defaults on contractual loan payments will result in charge-offs of account
balances, which, in turn, result in provisions for loan losses recorded on the consolidated
statements of income. By its nature, risk in lending cannot be completely eliminated, but it can be
controlled and managed through proper underwriting policies, effective collection procedures and
risk management activities. External factors, such as economic conditions, which cannot be
controlled by the Corporation, will always have some effect on asset quality, regardless of the
strength of an organizations control policies and procedures.
The Corporation has historically been able to maintain strong asset quality through different
economic cycles and, in recent years, asset quality measures, such as net charge-offs to average
loans and non-performing assets to total assets, have been at historically low levels. During 2007,
these measures began to return to more normal levels as a result of economic factors and their
impact on the overall lending environment, but also as a result of the repurchase of Resource
Mortgage loans, almost all of which were placed on non-accrual status or were foreclosed and
recorded in other real estate owned. At December 31, 2007, total non-performing assets were $120.9
million, or 0.76% of total assets. This represented an increase of $63.0 million, or 108.9%, from
$57.8 million at December 31, 2006. The Resource Mortgage repurchased loans increased
non-performing assets by approximately $29 million at December 31, 2007, or 0.18% of total assets.
Management believes that its policies and procedures for managing asset quality are sound. However,
there can be no assurance about maintaining strong asset quality in the future. Continuing
decreases in the values of underlying collateral or negative trends in general economic conditions
could have a detrimental impact on borrowers ability to repay their loans.
Capital and Liquidity Despite the decrease in net income in 2007, the Corporations
capital levels remain strong. At December 31, 2007, total leverage, tier 1 risk-based and total
risk-based capital, as defined in banking regulations, were 7.4%, 9.3% and 11.9%, respectively, as
compared to 7.6%, 9.8% and 11.7%, respectively, at December 31, 2006. These ratios continue to
exceed the minimum required to be considered well capitalized under the regulations. In addition,
from a liquidity standpoint, the Parent Company and its subsidiary banks have access to sufficient
funding sources to support operations. The Corporation has no plans to raise additional capital at
this time.
Equity Markets As disclosed in the Market Risk section of Managements Discussion,
equity valuations can have an impact on the Corporations financial performance. In particular,
bank stocks account for a significant portion of the Corporations equity investment portfolio.
Economic uncertainty surrounding the financial institution sector as a whole has impacted the value
of the Corporations financial institutions stock portfolio. Historically, gains on sales of these
equities have been a recurring component of the Corporations earnings. However, recent declines in
values have resulted in decreases in realized investment securities gains. During 2007, the
Corporations net gains on investment securities sales decreased $5.7 million, or 76.6%, with $5.1
million of the decrease attributable to bank stocks. As of December 31, 2007, the Corporations
bank stock portfolio had a net unrealized loss of $23.3 million, compared to a net unrealized loss
of $100,000 at December 31, 2006. These declines in bank stock portfolio values may impact the
Corporations ability to realize gains in the future.
Expense Control through Consolidation and Centralization During 2006 and 2007, the
Corporation continued to implement changes to its operating structure to improve expense
efficiency. Specifically, a number of subsidiary bank consolidations were completed. In December
2006, the former Premier Bank subsidiary was consolidated with Fulton Bank. In February 2007, the
former First Washington State Bank subsidiary was consolidated with The Bank. In May 2007, the
former Somerset Valley Bank subsidiary was consolidated with Skylands Community Bank. In July 2007,
the former Lebanon Valley Farmers Bank subsidiary was consolidated with Fulton Bank. The
Corporation also plans to complete the consolidation of Resource Bank with Fulton Bank in the
22
first quarter of 2008, at which time the total number of subsidiary banks will have decreased
from 15 to 10. The consolidated banks retain the local autonomy and decision-making that has long
been the Corporations operating model. However, by combining these banks, additional resources are
available to customers in their markets, and overlapping functions are eliminated.
During 2007, the Corporation also completed a workforce management initiative which resulted in the
centralization of a number of fragmented back office functions, including finance, human resources
and marketing, among others. A separate initiative in the branch system further reduced staffing and the related expense. The result of these initiatives,
plus staffing decreases at Resource Mortgage mainly due to exiting the national wholesale
residential mortgage business, was a decrease of 330 full-time equivalent employees, to 3,680 at
December 31, 2007 from 4,010 at December 31, 2006. Average full-time equivalent employees decreased
to 3,840 in 2007 from 4,020 in 2006. This decrease in employees will continue to benefit the
Corporation through lower salary and benefits costs in the future.
Acquisitions The Corporation has historically supplemented its internal growth with
strategic acquisitions, primarily of high quality community banks operating in desirable markets.
Upon acquisition, acquired organizations generally retain their status as separate legal entities
unless consolidation with an existing subsidiary bank is practical, as was the case in the
consolidations discussed in the previous section.
During 2007, the Corporation did not consummate or announce any bank acquisitions, as few
opportunities meeting the Corporations requirements of a comparable corporate culture, strong
performance and sound asset quality in high growth markets were available. In addition, the prices
being sought in many cases exceeded managements estimate of value. The Corporation will continue
to focus on generating growth in the most cost-effective manner.
RESULTS OF OPERATIONS
In February 2006, the Corporation acquired Columbia Bancorp (Columbia), of Columbia, Maryland, a
$1.3 billion bank holding company whose primary subsidiary was The Columbia Bank. Results for 2007
in comparison to 2006 were impacted by a full year contribution by Columbia in 2007, compared to an
eleven-month contribution in 2006. In July 2005, the Corporation acquired SVB Financial Services,
Inc. (SVB) of Somerville, New Jersey, a $530 million bank holding company whose primary subsidiary
was Somerset Valley Bank. Results for 2006 in comparison to 2005 were impacted by both the Columbia
and SVB acquisitions.
23
Net Interest Income
Net interest income is the most significant component of the Corporations net income. The ability
to manage net interest income over changing interest rate and economic environments is important to
the success of a financial institution. Growth in net interest income is generally dependent upon
balance sheet growth and/or maintaining or increasing the net interest margin. The Market Risk
section of Managements Discussion provides additional information on the policies and procedures
used by the Corporation to manage net interest income. The following table provides a comparative
average balance sheet and net interest income analysis for 2007 compared to 2006 and 2005. Interest
income and yields are presented on a fully taxable-equivalent (FTE) basis, using a 35% Federal tax
rate and statutory interest expense disallowances. The discussion following this table is based on
these tax-equivalent amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
(dollars in thousands) |
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
|
Balance |
|
|
Interest (1) |
|
|
Rate |
|
|
Balance |
|
|
Interest (1) |
|
|
Rate |
|
|
Balance |
|
|
Interest (1) |
|
|
Rate |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned
income (2) |
|
$ |
10,736,566 |
|
|
$ |
805,881 |
|
|
|
7.51 |
% |
|
$ |
9,892,082 |
|
|
$ |
731,057 |
|
|
|
7.39 |
% |
|
$ |
7,981,604 |
|
|
$ |
520,565 |
|
|
|
6.52 |
% |
Taxable inv. securities (3) |
|
|
2,157,325 |
|
|
|
99,621 |
|
|
|
4.62 |
|
|
|
2,268,209 |
|
|
|
97,652 |
|
|
|
4.31 |
|
|
|
1,996,005 |
|
|
|
74,921 |
|
|
|
3.75 |
|
Tax-exempt inv. securities (3) |
|
|
496,820 |
|
|
|
25,856 |
|
|
|
5.20 |
|
|
|
447,000 |
|
|
|
21,770 |
|
|
|
4.87 |
|
|
|
368,845 |
|
|
|
17,971 |
|
|
|
4.87 |
|
Equity securities (3) |
|
|
189,333 |
|
|
|
9,073 |
|
|
|
4.79 |
|
|
|
154,653 |
|
|
|
7,341 |
|
|
|
4.75 |
|
|
|
133,688 |
|
|
|
5,562 |
|
|
|
4.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
2,843,478 |
|
|
|
134,550 |
|
|
|
4.73 |
|
|
|
2,869,862 |
|
|
|
126,763 |
|
|
|
4.42 |
|
|
|
2,498,538 |
|
|
|
98,454 |
|
|
|
3.94 |
|
Loans held for sale |
|
|
166,437 |
|
|
|
11,501 |
|
|
|
6.91 |
|
|
|
215,255 |
|
|
|
15,564 |
|
|
|
7.23 |
|
|
|
241,996 |
|
|
|
14,940 |
|
|
|
6.17 |
|
Other interest-earning assets |
|
|
33,015 |
|
|
|
1,630 |
|
|
|
4.90 |
|
|
|
53,211 |
|
|
|
2,530 |
|
|
|
4.73 |
|
|
|
48,357 |
|
|
|
1,586 |
|
|
|
3.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
13,779,496 |
|
|
|
953,562 |
|
|
|
6.93 |
|
|
|
13,030,410 |
|
|
|
875,914 |
|
|
|
6.73 |
|
|
|
10,770,495 |
|
|
|
635,545 |
|
|
|
5.90 |
|
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
329,814 |
|
|
|
|
|
|
|
|
|
|
|
335,935 |
|
|
|
|
|
|
|
|
|
|
|
346,535 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
190,910 |
|
|
|
|
|
|
|
|
|
|
|
185,084 |
|
|
|
|
|
|
|
|
|
|
|
158,526 |
|
|
|
|
|
|
|
|
|
Other assets (3) |
|
|
899,292 |
|
|
|
|
|
|
|
|
|
|
|
852,186 |
|
|
|
|
|
|
|
|
|
|
|
598,709 |
|
|
|
|
|
|
|
|
|
Less: Allowance for
loan losses |
|
|
(109,054 |
) |
|
|
|
|
|
|
|
|
|
|
(105,934 |
) |
|
|
|
|
|
|
|
|
|
|
(92,780 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
15,090,458 |
|
|
|
|
|
|
|
|
|
|
$ |
14,297,681 |
|
|
|
|
|
|
|
|
|
|
$ |
11,781,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
1,696,624 |
|
|
$ |
28,331 |
|
|
|
1.67 |
% |
|
$ |
1,673,407 |
|
|
$ |
25,112 |
|
|
|
1.50 |
% |
|
$ |
1,547,766 |
|
|
$ |
15,370 |
|
|
|
0.99 |
% |
Savings deposits |
|
|
2,258,113 |
|
|
|
53,312 |
|
|
|
2.36 |
|
|
|
2,340,402 |
|
|
|
51,394 |
|
|
|
2.19 |
|
|
|
2,055,503 |
|
|
|
27,116 |
|
|
|
1.32 |
|
Time deposits |
|
|
4,553,994 |
|
|
|
212,752 |
|
|
|
4.67 |
|
|
|
4,134,190 |
|
|
|
170,435 |
|
|
|
4.12 |
|
|
|
3,171,901 |
|
|
|
98,288 |
|
|
|
3.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
8,508,731 |
|
|
|
294,395 |
|
|
|
3.46 |
|
|
|
8,147,999 |
|
|
|
246,941 |
|
|
|
3.03 |
|
|
|
6,775,170 |
|
|
|
140,774 |
|
|
|
2.08 |
|
Short-term borrowings |
|
|
1,574,495 |
|
|
|
73,983 |
|
|
|
4.66 |
|
|
|
1,653,974 |
|
|
|
78,043 |
|
|
|
4.67 |
|
|
|
1,186,464 |
|
|
|
34,414 |
|
|
|
2.87 |
|
Long-term debt |
|
|
1,579,527 |
|
|
|
82,455 |
|
|
|
5.22 |
|
|
|
1,069,868 |
|
|
|
53,960 |
|
|
|
5.04 |
|
|
|
839,694 |
|
|
|
38,031 |
|
|
|
4.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
11,662,753 |
|
|
|
450,833 |
|
|
|
3.86 |
|
|
|
10,871,841 |
|
|
|
378,944 |
|
|
|
3.48 |
|
|
|
8,801,328 |
|
|
|
213,219 |
|
|
|
2.42 |
|
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
1,713,863 |
|
|
|
|
|
|
|
|
|
|
|
1,807,248 |
|
|
|
|
|
|
|
|
|
|
|
1,589,265 |
|
|
|
|
|
|
|
|
|
Other |
|
|
183,229 |
|
|
|
|
|
|
|
|
|
|
|
173,799 |
|
|
|
|
|
|
|
|
|
|
|
136,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
13,559,845 |
|
|
|
|
|
|
|
|
|
|
|
12,852,888 |
|
|
|
|
|
|
|
|
|
|
|
10,527,009 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
1,530,613 |
|
|
|
|
|
|
|
|
|
|
|
1,444,793 |
|
|
|
|
|
|
|
|
|
|
|
1,254,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabs. and Equity |
|
$ |
15,090,458 |
|
|
|
|
|
|
|
|
|
|
$ |
14,297,681 |
|
|
|
|
|
|
|
|
|
|
$ |
11,781,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net
interest margin (FTE) |
|
|
|
|
|
|
502,729 |
|
|
|
3.66 |
% |
|
|
|
|
|
|
496,970 |
|
|
|
3.82 |
% |
|
|
|
|
|
|
422,326 |
|
|
|
3.93 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent adjustment |
|
|
|
|
|
|
(13,985 |
) |
|
|
|
|
|
|
|
|
|
|
(11,407 |
) |
|
|
|
|
|
|
|
|
|
|
(9,778 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
488,744 |
|
|
|
|
|
|
|
|
|
|
$ |
485,563 |
|
|
|
|
|
|
|
|
|
|
$ |
412,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes dividends earned on equity securities. |
|
(2) |
|
Includes non-performing loans. |
|
(3) |
|
Balances include amortized historical cost for available for sale securities. The related unrealized holding gains (losses) are included in other assets. |
24
The following table sets forth a summary of changes in FTE interest income and expense resulting
from changes in average balances (volumes) and changes in rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 vs. 2006 |
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005 |
|
|
|
|
|
|
|
Increase (decrease) due |
|
|
Increase (decrease) due |
|
|
|
to change in |
|
|
to change in |
|
|
|
Volume |
|
|
Rate |
|
|
Net |
|
|
Volume |
|
|
Rate |
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Interest income on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
63,236 |
|
|
$ |
11,588 |
|
|
$ |
74,824 |
|
|
$ |
135,262 |
|
|
$ |
75,230 |
|
|
$ |
210,492 |
|
Taxable investment securities |
|
|
(4,913 |
) |
|
|
6,882 |
|
|
|
1,969 |
|
|
|
10,940 |
|
|
|
11,791 |
|
|
|
22,731 |
|
Tax-exempt investment securities |
|
|
2,529 |
|
|
|
1,557 |
|
|
|
4,086 |
|
|
|
3,805 |
|
|
|
(6 |
) |
|
|
3,799 |
|
Equity securities |
|
|
1,661 |
|
|
|
71 |
|
|
|
1,732 |
|
|
|
937 |
|
|
|
842 |
|
|
|
1,779 |
|
Loans held for sale |
|
|
(3,399 |
) |
|
|
(664 |
) |
|
|
(4,063 |
) |
|
|
(1,762 |
) |
|
|
2,386 |
|
|
|
624 |
|
Short-term investments |
|
|
(984 |
) |
|
|
84 |
|
|
|
(900 |
) |
|
|
173 |
|
|
|
771 |
|
|
|
944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
$ |
58,130 |
|
|
$ |
19,518 |
|
|
$ |
77,648 |
|
|
$ |
149,355 |
|
|
$ |
91,014 |
|
|
$ |
240,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
352 |
|
|
$ |
2,867 |
|
|
$ |
3,219 |
|
|
$ |
1,335 |
|
|
$ |
8,407 |
|
|
$ |
9,742 |
|
Savings deposits |
|
|
(1,914 |
) |
|
|
3,832 |
|
|
|
1,918 |
|
|
|
4,229 |
|
|
|
20,049 |
|
|
|
24,278 |
|
Time deposits |
|
|
18,304 |
|
|
|
24,013 |
|
|
|
42,317 |
|
|
|
34,536 |
|
|
|
37,611 |
|
|
|
72,147 |
|
Short-term borrowings |
|
|
(3,892 |
) |
|
|
(168 |
) |
|
|
(4,060 |
) |
|
|
16,848 |
|
|
|
26,781 |
|
|
|
43,629 |
|
Long-term debt |
|
|
26,543 |
|
|
|
1,952 |
|
|
|
28,495 |
|
|
|
11,262 |
|
|
|
4,667 |
|
|
|
15,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
$ |
39,393 |
|
|
$ |
32,496 |
|
|
$ |
71,889 |
|
|
$ |
68,210 |
|
|
$ |
97,515 |
|
|
$ |
165,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: Changes which are partially attributable to rate and volume are allocated based on the proportion of the direct changes attributable to rate and volume. |
2007 vs. 2006
Net interest income increased $5.8 million, or 1.2%, from $497.0 million in 2006 to $502.7 million
in 2007 due to an increase in average interest-earning assets, offset by a decline in net interest
margin.
Average interest-earning assets grew 5.7%, from $13.0 billion in 2006 to $13.8 billion in 2007.
Interest income increased $77.6 million, or 8.9%, primarily as a result of an increase in average
interest-earning assets, which contributed $58.1 million to the increase, with the remaining growth
in interest income due to the 20 basis point, or 3.0%, increase in average rates on
interest-earning assets. Columbia contributed approximately $99 million to the increase in average
interest-earning assets.
The increase in average interest-earning assets was primarily due to loan growth. Average loans
increased by $844.5 million, or 8.5%, to $10.7 billion in 2007. The following table presents the
growth in average loans, net of unearned income, by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) |
|
|
|
2007 |
|
|
2006 |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
Commercial industrial, financial and agricultural |
|
$ |
3,213,357 |
|
|
$ |
2,814,489 |
|
|
$ |
398,868 |
|
|
|
14.2 |
% |
Real estate commercial mortgage |
|
|
3,337,762 |
|
|
|
3,073,830 |
|
|
|
263,932 |
|
|
|
8.6 |
|
Real estate residential mortgage |
|
|
753,789 |
|
|
|
640,775 |
|
|
|
113,014 |
|
|
|
17.6 |
|
Real estate home equity |
|
|
1,454,753 |
|
|
|
1,417,259 |
|
|
|
37,494 |
|
|
|
2.6 |
|
Real estate construction |
|
|
1,384,548 |
|
|
|
1,345,191 |
|
|
|
39,357 |
|
|
|
2.9 |
|
Consumer |
|
|
506,201 |
|
|
|
522,761 |
|
|
|
(16,560 |
) |
|
|
(3.2 |
) |
Leasing and other |
|
|
86,156 |
|
|
|
77,777 |
|
|
|
8,379 |
|
|
|
10.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,736,566 |
|
|
$ |
9,892,082 |
|
|
$ |
844,484 |
|
|
|
8.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan growth was particularly strong in the commercial loan and commercial mortgage categories,
which together increased $662.8 million, or 11.3%, with Columbia contributing approximately $35
million to the increase. The remaining growth in commercial loans
25
was across all commercial loan types, and throughout most subsidiary banks and geographical regions. The remaining growth in
commercial mortgages was primarily in adjustable rate mortgages.
The increases in residential mortgage loans of $113.0 million, or 17.6%, was due to growth in
adjustable rate mortgage loans ($87.9 million, or a 20.6% increase) and the impact of the $23.7
million of repurchased Resource Mortgage loans outstanding as of December 31, 2007.
Additional increases in loans were due to increases in construction loans of $39.4 million, or
2.9%, and home equity loans of $37.5 million, or 2.6%. Columbia contributed approximately $36
million and $16 million to the increases in construction loans and home equity loans, respectively.
The remaining increase in home equity loans was due to the repurchase of Resource Mortgage loans
during 2007 and the introduction of a blended fixed/floating rate product in late 2007.
Offsetting these increases was a $16.6 million, or 3.2%, decrease in average consumer loans. The
Corporations indirect automobile portfolio decreased $33.9 million, or 10.9%, while growth in
credit card outstandings of $17.0 million, or 28.2%, somewhat offset this decline.
The average yield on loans during 2007 of 7.51% represented a 12 basis point, or 1.6%, increase in
comparison to 2006. The increase in the average yield on loans reflected a higher average rate
environment, as illustrated by a higher average prime rate in 2007 (8.03%) as compared to 2006
(7.96%).
Average loans held for sale decreased $48.8 million, or 22.7%, as a result of lower volumes mainly
due to the exit from the national wholesale mortgage business.
Average investments decreased $26.4 million, or 0.9%, while the average yield on investment
securities increased 31 basis points from 4.42% in 2006 to 4.73% in 2007. The increase in yield was
primarily attributable to the Corporations systematic reinvestment of normal portfolio cash flows,
primarily from lower duration, significantly lower yielding balloon mortgage-backed securities,
into a combination of higher yielding mortgage-backed pass-through securities, conservative
collateralized mortgage obligations, as well as longer term municipal securities. Also contributing
to the increase in yield was a reduction in premium amortization, which is accounted for as an
offset to interest income, from $4.8 million in 2006 to $3.5 million in 2007. The decrease in
amortization reflects the cumulative impact of initiatives to reduce the premium levels of
mortgage-backed securities purchased during 2006 and 2007 and stable prepayment experience on
relatively short duration mortgage-backed securities purchased prior to that period.
The increase in interest income was offset by an increase in interest expense of $71.9 million, or
19.0%, to $450.8 million in 2007 from $378.9 million in 2006. Interest expense increased $39.4
million due to a $790.9 million, or 7.3%, increase in average interest-bearing liabilities and
$32.5 million due to a 38 basis point, or 10.9%, increase in the average cost of total
interest-bearing liabilities. The increase in the average cost of interest-bearing liabilities
primarily resulted from a change in deposit composition as non-interest bearing demand and lower
cost savings and money market deposits shifted toward higher cost certificates of deposit. Columbia
contributed approximately $81 million to the increase in average interest-bearing liabilities.
The following table summarizes the change in average deposits, by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) |
|
|
|
2007 |
|
|
2006 |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
Noninterest-bearing demand |
|
$ |
1,713,863 |
|
|
$ |
1,807,248 |
|
|
$ |
(93,385 |
) |
|
|
(5.2 |
%) |
Interest-bearing demand |
|
|
1,696,624 |
|
|
|
1,673,407 |
|
|
|
23,217 |
|
|
|
1.4 |
|
Savings/money market |
|
|
2,258,113 |
|
|
|
2,340,402 |
|
|
|
(82,289 |
) |
|
|
(3.5 |
) |
Time deposits |
|
|
4,553,994 |
|
|
|
4,134,190 |
|
|
|
419,804 |
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,222,594 |
|
|
$ |
9,955,247 |
|
|
$ |
267,347 |
|
|
|
2.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The time deposit increase of $419.8 million was due to normal growth and existing customers
shifting funds from noninterest-bearing and interest-bearing demand and
26
savings accounts to time deposits to take advantage of higher rates. The net decrease in demand and savings accounts of
$152.5 million, or 2.6%, was net of an approximately $42 million increase related to the Columbia
acquisition. Growing core deposits continued to be a challenge for the Corporation, and banks in
general, as more attractive investment opportunities existed for consumers over the past two years,
including equity markets and higher yielding time deposits.
The following table summarizes the changes in average borrowings, by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) |
|
|
|
2007 |
|
|
2006 |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
Short-term borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer repurchase agreements |
|
$ |
247,948 |
|
|
$ |
352,454 |
|
|
$ |
(104,506 |
) |
|
|
(29.7 |
%) |
Short-term promissory notes |
|
|
404,527 |
|
|
|
163,199 |
|
|
|
241,328 |
|
|
|
147.9 |
|
Federal funds purchased |
|
|
808,358 |
|
|
|
1,095,875 |
|
|
|
(287,517 |
) |
|
|
(26.2 |
) |
Other short-term borrowings |
|
|
113,662 |
|
|
|
42,446 |
|
|
|
71,216 |
|
|
|
167.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings |
|
|
1,574,495 |
|
|
|
1,653,974 |
|
|
|
(79,479 |
) |
|
|
(4.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB Advances |
|
|
1,212,085 |
|
|
|
769,334 |
|
|
|
442,751 |
|
|
|
57.5 |
|
Other long-term debt |
|
|
367,442 |
|
|
|
300,534 |
|
|
|
66,908 |
|
|
|
22.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
1,579,527 |
|
|
|
1,069,868 |
|
|
|
509,659 |
|
|
|
47.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
$ |
3,154,022 |
|
|
$ |
2,723,842 |
|
|
$ |
430,180 |
|
|
|
15.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2007, the Corporation obtained additional funding, primarily as a result of loan growth,
through an increase in borrowings. Average borrowings increased $430.2 million, or 15.8%, during
2007, with Columbia contributing approximately $21 million to the increase. The $79.5 million, or
4.8%, decrease in short-term borrowings was mainly due to a decrease in Federal funds purchased,
offset by a net increase of $136.8 million, or 26.5%, in short-term promissory notes and customer
repurchase agreements. Average long-term debt increased $509.7 million, or 47.6%, to $1.6 billion.
The increase in long-term debt was primarily due to increases in Federal Home Loan Bank (FHLB)
advances as longer-term rates were locked and durations were extended to manage interest rate risk,
and partially due to the May 2007 issuance of $100.0 million of ten-year subordinated notes. On an
ending balance basis, however, short-term borrowings increased $703.1 million, or 41.8%, as
continued growth in loans and investments during the latter part of 2007 required additional
funding that could not be generated by deposit growth. See further discussion in the Financial
Condition section of Managements Discussion.
2006 vs. 2005
Net interest income increased $74.6 million, or 17.7%, from $422.3 million in 2005 to $497.0
million in 2006, primarily as a result of increases in average balances of interest-earning assets
and partially as a result of increases in rates.
Average interest-earning assets grew 21.0%, from $10.8 billion in 2005 to $13.0 billion in 2006,
with acquisitions contributing approximately $1.4 billion to this increase. Interest income
increased $240.4 million, or 37.8%, primarily as a result of the increase in average
interest-earning assets, which contributed $149.4 million of the increase, with the remaining
growth in interest income due to the 83 basis point, or 14.1%, increase in average rates on
interest-earning assets.
Average loans, net of unearned income increased by $1.9 billion, or 23.9%, to $9.9 billion in 2006.
Acquisitions contributed approximately $1.2 billion to this increase in average balances. Loan
growth was strong in the commercial mortgage and construction categories, which together increased
$459.3 million, or 14.1%, over 2005. Commercial loans grew $162.8 million, or 7.0%, in comparison
to 2005. Residential mortgage and home equity loans increased $112.4 million, or 6.7%, in
comparison to 2005 due to promotional efforts and customers using home equity loans as a
cost-effective refinance alternative. The average yield on loans during 2006 of 7.39% represented
an 87 basis point, or 13.3%, increase in comparison to 2005. This increase reflected the impact of
a significant portfolio of floating rate loans, which repriced as interest rates rose, as they did
in 2006, and the addition of higher yielding new loans.
27
Average investments increased $371.3 million, or 14.9%, in comparison to 2005, with acquisitions
contributing $285.2 million. Excluding the impact of acquisitions, the investment balances
increased $86.1 million, or 3.5%. During the second half of 2006, the Corporation pre-purchased
approximately $250.0 million of investment securities, based on expected cash inflows from
maturities of investments over the subsequent six-month period. These were funded by a combination
of short and longer-term borrowings, a portion of which have been repaid with maturities of
investments, while the remaining portion was repaid during 2007. The average yield on investment
securities improved 48 basis points to 4.42% in 2006 from 3.94% in 2005. The increase was due to
the maturity of lower yielding investments, with reinvestment at higher rates. Also contributing to
the increase was a reduction in premium amortization, which is accounted for as a reduction of
interest income, from $6.9 million in 2005 to $4.8 million in 2006, due to both a reduction in
premiums on purchases of mortgage-backed securities in 2006 and due to decreased prepayments on
mortgage-backed securities as interest rates rose.
The increase in interest income was offset by an increase in interest expense of $165.7 million, or
77.7%, to $378.9 million in 2006 from $213.2 million in 2005. The increase in interest expense was
primarily due to a 106 basis point, or 43.8%, increase in the average cost of total
interest-bearing liabilities in 2006 in comparison to 2005. The remaining increase in interest
expense was due to a $2.1 billion, or 23.5%, increase in average interest-bearing liabilities, partially due to
acquisitions and partially due to internal growth.
The Corporation experienced significant growth in certificates of deposit of $962.3 million, or
30.3%, as a result of the FRBs rate increases during 2006, making them an attractive investment
alternative for customers and due to acquisitions contributing $554.0 million. The change in the
composition of deposits contributed to the 95 basis point, or 45.7%, increase in the average cost
of interest-bearing deposits in comparison to 2005.
Average borrowings increased $697.7 million, or 34.4%, during 2006, with acquisitions contributing
$253.9 million. Excluding the impact of acquisitions, average short-term borrowings increased
$242.9 million, or 20.5%, to $1.4 billion. The increase in short-term borrowings was mainly due to
an increase in Federal funds purchased to fund loan growth, offset slightly by lower borrowings
outstanding under customer repurchase agreements. Average long-term debt increased $230.2 million,
or 27.4%, to $1.1 billion, with acquisitions contributing $29.3 million. The additional increase in
long-term debt was primarily due to the issuance of $154.6 million of junior subordinated
deferrable interest debentures in January 2006, the impact of $100.0 million of subordinated debt
issued and outstanding since March 2005 and additional FHLB advances.
Provision and Allowance for Credit Losses
The Corporation accounts for the credit risk associated with lending activities through its
allowance for credit losses and provision for loan losses. The provision is the expense recognized
on the consolidated statements of income to adjust the allowance to its proper balance, as
determined through the application of the Corporations allowance methodology procedures. These
procedures include the evaluation of the risk characteristics of the portfolio and documentation in
accordance with the Securities and Exchange Commissions (SEC) Staff Accounting Bulletin No. 102,
Selected Loan Loss Allowance Methodology and Documentation Issues (SAB 102). See the Critical
Accounting Policies section of Managements Discussion for a discussion of the Corporations
allowance for credit loss evaluation methodology.
28
A summary of the Corporations loan loss experience follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(dollars in thousands) |
|
Loans, net of unearned income outstanding
at end of year |
|
$ |
11,204,424 |
|
|
$ |
10,374,323 |
|
|
$ |
8,424,728 |
|
|
$ |
7,533,915 |
|
|
$ |
6,140,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily average balance of loans, net of
unearned income |
|
$ |
10,736,566 |
|
|
$ |
9,892,082 |
|
|
$ |
7,981,604 |
|
|
$ |
6,857,386 |
|
|
$ |
5,564,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of allowance for credit losses
at beginning of year |
|
$ |
106,884 |
|
|
$ |
92,847 |
|
|
$ |
89,627 |
|
|
$ |
77,700 |
|
|
$ |
71,920 |
|
Loans charged off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial financial and agricultural |
|
|
6,796 |
|
|
|
3,013 |
|
|
|
4,095 |
|
|
|
3,482 |
|
|
|
6,604 |
|
Real estate mortgage |
|
|
1,206 |
|
|
|
429 |
|
|
|
467 |
|
|
|
1,466 |
|
|
|
1,476 |
|
Consumer |
|
|
3,678 |
|
|
|
3,138 |
|
|
|
3,436 |
|
|
|
3,476 |
|
|
|
4,497 |
|
Leasing and other |
|
|
2,059 |
|
|
|
389 |
|
|
|
206 |
|
|
|
453 |
|
|
|
651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans charged off |
|
|
13,739 |
|
|
|
6,969 |
|
|
|
8,204 |
|
|
|
8,877 |
|
|
|
13,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries of loans previously charged off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial financial and agricultural |
|
|
1,664 |
|
|
|
2,863 |
|
|
|
2,705 |
|
|
|
2,042 |
|
|
|
1,210 |
|
Real estate mortgage |
|
|
178 |
|
|
|
268 |
|
|
|
1,245 |
|
|
|
906 |
|
|
|
711 |
|
Consumer |
|
|
1,246 |
|
|
|
1,289 |
|
|
|
1,169 |
|
|
|
1,496 |
|
|
|
1,811 |
|
Leasing and other |
|
|
913 |
|
|
|
97 |
|
|
|
77 |
|
|
|
76 |
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
4,001 |
|
|
|
4,517 |
|
|
|
5,196 |
|
|
|
4,520 |
|
|
|
3,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged off |
|
|
9,738 |
|
|
|
2,452 |
|
|
|
3,008 |
|
|
|
4,357 |
|
|
|
9,399 |
|
Provision for loan losses |
|
|
15,063 |
|
|
|
3,498 |
|
|
|
3,120 |
|
|
|
4,717 |
|
|
|
9,705 |
|
Allowance purchased |
|
|
|
|
|
|
12,991 |
|
|
|
3,108 |
|
|
|
11,567 |
|
|
|
5,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
112,209 |
|
|
$ |
106,884 |
|
|
$ |
92,847 |
|
|
$ |
89,627 |
|
|
$ |
77,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Allowance for Credit Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
107,547 |
|
|
$ |
106,884 |
|
|
$ |
92,847 |
|
|
$ |
89,627 |
|
|
$ |
77,700 |
|
Reserve for unfunded lending commitments (1) |
|
|
4,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
$ |
112,209 |
|
|
$ |
106,884 |
|
|
$ |
92,847 |
|
|
$ |
89,627 |
|
|
$ |
77,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Asset Quality Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans, net of
unearned income |
|
|
0.09 |
% |
|
|
0.02 |
% |
|
|
0.04 |
% |
|
|
0.06 |
% |
|
|
0.17 |
% |
Allowance for loan losses to loans, net of unearned
income outstanding at end of year |
|
|
0.96 |
% |
|
|
1.03 |
% |
|
|
1.10 |
% |
|
|
1.19 |
% |
|
|
1.27 |
% |
Allowance for credit losses to loans, net of unearned
income outstanding at end of year |
|
|
1.00 |
% |
|
|
1.03 |
% |
|
|
1.10 |
% |
|
|
1.19 |
% |
|
|
1.27 |
% |
Non-performing assets (2) to total assets |
|
|
0.76 |
% |
|
|
0.39 |
% |
|
|
0.38 |
% |
|
|
0.30 |
% |
|
|
0.33 |
% |
Non-accrual loans to total loans, net of
unearned income |
|
|
0.68 |
% |
|
|
0.32 |
% |
|
|
0.43 |
% |
|
|
0.30 |
% |
|
|
0.37 |
% |
|
|
|
(1) |
|
Reserve for unfunded lending commitments transferred to other liabilities as of December
31, 2007. Prior periods were not reclassified. |
|
(2) |
|
Includes accruing loans past due 90 days or more. |
29
The following table presents the aggregate amount of non-accrual and past due loans and other real
estate owned (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(in thousands) |
|
Non-accrual loans (1) (2) (3) |
|
$ |
76,150 |
|
|
$ |
33,113 |
|
|
$ |
36,560 |
|
|
$ |
22,574 |
|
|
$ |
22,422 |
|
Accruing loans past due 90 days or more |
|
|
29,782 |
|
|
|
20,632 |
|
|
|
9,012 |
|
|
|
8,318 |
|
|
|
9,609 |
|
Other real estate |
|
|
14,934 |
|
|
|
4,103 |
|
|
|
2,072 |
|
|
|
2,209 |
|
|
|
585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
120,866 |
|
|
$ |
57,848 |
|
|
$ |
47,644 |
|
|
$ |
33,101 |
|
|
$ |
32,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In 2007, the total interest income that would have been recorded if
non-accrual loans had been current in accordance with their original terms
was approximately $6.0 million. The amount of interest income on non-accrual
loans that was included in 2007 income was approximately $1.7 million. |
|
(2) |
|
Accrual of interest is generally discontinued when a loan becomes 90
days past due as to principal and interest. When interest accruals are
discontinued, interest credited to income is reversed. Non-accrual loans are
restored to accrual status when all delinquent principal and interest becomes
current or the loan is considered secured and in the process of collection.
Certain loans, primarily adequately collateralized mortgage loans, may
continue to accrue interest after reaching 90 days past due. |
|
(3) |
|
Excluded from the amounts presented at December 31, 2007 were $240.2
million in loans where possible credit problems of borrowers have caused
management to have doubts as to the ability of such borrowers to comply with
the present loan repayment terms. These loans were reviewed for impairment
under the Financial Accounting Standards Boards Statement of Financial
Accounting Standards No. 114, Accounting by Creditors for Impairment of a
Loan, but continue to pay according to their contractual terms and are,
therefore, not included in non-performing loans. Non-accrual loans include
$24.5 million of impaired loans. |
The following table summarizes the allocation of the allowance for loan losses by loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
Loans |
|
|
|
|
|
|
Loans |
|
|
|
|
|
|
Loans in |
|
|
|
|
|
|
Loans in |
|
|
|
|
|
|
Loans in |
|
|
|
Allow- |
|
|
In Each |
|
|
Allow- |
|
|
In Each |
|
|
Allow- |
|
|
Each |
|
|
Allow- |
|
|
Each |
|
|
Allow- |
|
|
Each |
|
|
|
ance |
|
|
Category |
|
|
ance |
|
|
Category |
|
|
ance |
|
|
Category |
|
|
ance |
|
|
Category |
|
|
ance |
|
|
Category |
|
Comml financial &
agricultural |
|
$ |
53,194 |
|
|
|
30.6 |
% |
|
$ |
52,942 |
|
|
|
28.6 |
% |
|
$ |
52,379 |
|
|
|
28.2 |
% |
|
$ |
43,207 |
|
|
|
30.1 |
% |
|
$ |
34,247 |
|
|
|
31.7 |
% |
Real estate
Mortgage |
|
|
35,584 |
|
|
|
64.2 |
|
|
|
37,197 |
|
|
|
65.5 |
|
|
|
17,602 |
|
|
|
64.7 |
|
|
|
19,784 |
|
|
|
62.5 |
|
|
|
14,471 |
|
|
|
59.0 |
|
Consumer, leasing
& other |
|
|
8,142 |
|
|
|
5.2 |
|
|
|
6,475 |
|
|
|
5.9 |
|
|
|
7,935 |
|
|
|
7.1 |
|
|
|
16,289 |
|
|
|
7.4 |
|
|
|
16,279 |
|
|
|
9.3 |
|
Unallocated |
|
|
10,627 |
|
|
|
|
|
|
|
10,270 |
|
|
|
|
|
|
|
14,931 |
|
|
|
|
|
|
|
10,347 |
|
|
|
|
|
|
|
12,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
107,547 |
|
|
|
100.0 |
% |
|
$ |
106,884 |
|
|
|
100.0 |
% |
|
$ |
92,847 |
|
|
|
100.0 |
% |
|
$ |
89,627 |
|
|
|
100.0 |
% |
|
$ |
77,700 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for loan losses increased $11.6 million, or 330.6%, from $3.5 million in 2006 to
$15.1 million in 2007. Net charge-offs as a percentage of average loans were 0.09% in 2007, a seven
basis point increase from 0.02% in 2006, which was a two basis point decrease from 2005. Total net
charge-offs were $9.7 million in 2007 and $2.5 million in 2006.
Non-performing assets increased $63.0 million, or 108.9%, in 2007. Non-performing assets as a
percentage of total assets increased from 0.39% at December 31, 2006 to 0.76% at December 31, 2007,
after increasing only one basis point in 2006.
Over the several years prior to 2007, the Corporations net charge-off and non-performing asset
levels were at historic lows. The current years levels reflect a return to more average historical
levels and were primarily due to general economic factors as opposed to specific risk
concentrations within the Corporations loan portfolio. The increase in non-performing loans
included construction
30
loans, which increased $17.5 million, or 131.1%, to $30.9 million, commercial loans, which
increased $6.0 million, or 27.7%, to $27.7 million and commercial mortgages, which increased $5.7
million, or 65.4%, to $14.5 million. In addition, non-performing assets also increased due to the
repurchase of residential mortgage loans and home equity loans by Resource Mortgage, which added
approximately $15 million to non-performing loans and approximately $14 million to other real
estate as of December 31, 2007. Continued slowdowns in the residential housing market could
negatively impact non-performing asset levels in 2008.
The provision for loan losses is determined by the allowance allocation process, whereby an
estimated need is allocated to impaired loans as defined by the Financial Accounting Standards
Boards (FASB) Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan (Statement 114), or to pools of loans under Statement of Financial Accounting
Standards No. 5, Accounting for Contingencies (Statement 5). The allocation is based on risk
factors, collateral levels, economic conditions and other relevant factors, as appropriate. The
Corporation also maintains an unallocated allowance, which was approximately 10% at December 31,
2007. The unallocated allowance is used to cover any factors or conditions that might exist at the
balance sheet date, but are not specifically identifiable. Management believes such an unallocated
allowance is reasonable and appropriate as the estimates used in the allocation process are
inherently imprecise. See additional disclosures in Note A, Summary of Significant Accounting
Policies, in the Notes to Consolidated Financial Statements and Critical Accounting Policies, in
Managements Discussion. Management believes that the allowance for loan loss balance of $107.5
million at December 31, 2007 is sufficient to cover losses inherent in the loan portfolio on that
date and is appropriate based on applicable accounting standards.
Other Income and Expenses
2007 vs. 2006
Other Income
The following table presents the components of other income for the past two years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) |
|
|
|
2007 |
|
|
2006 |
|
|
$ |
|
|
% |
|
|
|
(dollars in thousands) |
|
Service charges on deposit accounts |
|
$ |
46,500 |
|
|
$ |
43,773 |
|
|
$ |
2,727 |
|
|
|
6.2 |
% |
Investment management and trust services |
|
|
38,665 |
|
|
|
37,441 |
|
|
|
1,224 |
|
|
|
3.3 |
|
Other service charges and fees |
|
|
32,151 |
|
|
|
26,792 |
|
|
|
5,359 |
|
|
|
20.0 |
|
Gains on the sale of mortgage loans |
|
|
14,294 |
|
|
|
21,086 |
|
|
|
(6,792 |
) |
|
|
(32.2 |
) |
Other |
|
|
14,674 |
|
|
|
13,344 |
|
|
|
1,330 |
|
|
|
10.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, excluding investment securities gains |
|
|
146,284 |
|
|
|
142,436 |
|
|
|
3,848 |
|
|
|
2.7 |
|
Investment securities gains |
|
|
1,740 |
|
|
|
7,439 |
|
|
|
(5,699 |
) |
|
|
(76.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
148,024 |
|
|
$ |
149,875 |
|
|
$ |
(1,851 |
) |
|
|
(1.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in service charges on deposit accounts was due to increases of $1.5 million and $1.8
million in cash management fees and overdraft fees, respectively, offset by a $591,000 decrease in
other service charges earned on both business and personal deposit accounts. The increase in
overdraft fees was partially due to a new overdraft program which began in November 2007. The
increase in investment management and trust services was primarily due to trust revenue ($1.4
million, or 5.9%), offset by a decrease in brokerage revenue of $206,000, or 1.6%. The increase in
trust revenue was due to improvements in equity markets increasing the values of assets under
management.
Other service charges and fees grew $5.4 million, or 20.0%, led by an increase of $3.0 million in
foreign currency processing revenue as a result of the acquisition of a foreign currency processing
company at the end of 2006, a $1.2 million, or 15.9%, increase in debit card fees and an increase
in merchant fees of $664,000, or 9.7%. Both debit card fees and merchant fees increased as a result
of growth in transaction volume.
Decreases in gains on sales of mortgage loans resulted from lower sales volumes, offset by an
increase on the spread on sales of 3 basis points, or 2.9%. Total loans sold were $1.3 billion in
2007 and $2.0 billion in 2006. Of the $679.4 million, or 34.9%, decrease, $636.4 million occurred
at Resource Mortgage, mainly due to the exit from the national wholesale residential mortgage
business.
31
The increase in other income was primarily due to a $2.1 million gain related to the resolution of
litigation and the sale of certain assets between Resource Bank and an unaffiliated bank, offset by
lower gains on sales of bank facilities in 2007.
Investment securities gains decreased $5.7 million, or 76.6%, in 2007. Investment securities gains,
net of realized losses, included realized gains on the sale of equity securities of $1.6 million in
2007, compared to $7.0 million in 2006, and net gains of $96,000 on the sales of available for sale
debt securities in 2007, compared to $474,000 in 2006.
Other Expenses
The following table presents the components of other expenses for each of the past two years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) |
|
|
|
2007 |
|
|
2006 |
|
|
$ |
|
|
% |
|
|
|
(dollars in thousands) |
|
Salaries and employee benefits |
|
$ |
217,526 |
|
|
$ |
213,913 |
|
|
$ |
3,613 |
|
|
|
1.7 |
% |
Net occupancy expense |
|
|
39,965 |
|
|
|
36,493 |
|
|
|
3,472 |
|
|
|
9.5 |
|
Operating risk loss |
|
|
27,229 |
|
|
|
4,818 |
|
|
|
22,411 |
|
|
|
465.2 |
|
Equipment expense |
|
|
13,892 |
|
|
|
14,251 |
|
|
|
(359 |
) |
|
|
(2.5 |
) |
Data processing |
|
|
12,755 |
|
|
|
12,228 |
|
|
|
527 |
|
|
|
4.3 |
|
Advertising |
|
|
11,334 |
|
|
|
10,638 |
|
|
|
696 |
|
|
|
6.5 |
|
Intangible amortization |
|
|
8,334 |
|
|
|
7,907 |
|
|
|
427 |
|
|
|
5.4 |
|
Telecommunications |
|
|
8,094 |
|
|
|
7,966 |
|
|
|
128 |
|
|
|
1.6 |
|
Professional fees |
|
|
7,277 |
|
|
|
5,057 |
|
|
|
2,220 |
|
|
|
43.9 |
|
Supplies |
|
|
5,825 |
|
|
|
6,245 |
|
|
|
(420 |
) |
|
|
(6.7 |
) |
Postage |
|
|
5,312 |
|
|
|
5,154 |
|
|
|
158 |
|
|
|
3.1 |
|
Other |
|
|
47,912 |
|
|
|
41,321 |
|
|
|
6,591 |
|
|
|
16.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
405,455 |
|
|
$ |
365,991 |
|
|
$ |
39,464 |
|
|
|
10.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits increased $3.6 million, or 1.7%, with salaries increasing $1.6
million, or 0.9%, and benefits increasing $2.0 million, or 5.3%.
The slight increase in salaries was due to lower salary deferrals as residential mortgage
origination volumes declined, offset by reductions in bonus expense. Full-time and part-time
salaries decreased by $619,000, or 0.4%, due to normal salary increases being offset by decreases
from Resource Mortgage and other staff reductions made as part of a corporate-wide workforce
management and centralization initiative. Average full-time equivalent employees decreased from
4,020 in 2006 to 3,840 in 2007. At December 31, 2007, full-time equivalent employees were
approximately 3,680.
Employee benefits increased
$2.0 million, or 5.3%, primarily due to $2.0 million of severance
expense related to staff reductions and a $578,000 increase in healthcare costs, offset by reduced
retirement expense as a result of the curtailment of the defined benefit pension plan during 2007.
See Note L, Employee Benefit Plans in the Notes to Consolidated Financial Statements for
additional information.
Net occupancy expense increased $3.5 million, or 9.5%. The increase in net occupancy expense was
due to additional expenses related to rental, maintenance, utility and depreciation of real
property as a result of growth in the branch network during 2007 in comparison to 2006, as well as
the impact of the Columbia acquisition. During 2006 and 2007, the Corporation added 11 and 3 full
service branches to its network, respectively.
The increase in operating risk loss was due to $25.1 million of charges recorded during 2007 for
losses on the actual and potential repurchase of residential mortgage loans and home equity loans
that had been originated and sold in the secondary market. See Residential Lending in the
Overview section of Managements Discussion for additional information.
32
Professional fees increased $2.2 million, or 43.9%, due to fees incurred for an independent review
of Resource Mortgage resulting from the repurchase issues, greater reductions in legal fees during
2006 related to recoveries of non-accrual loans, and an increase in other unrelated legal fees. See
Residential Lending within the Overview section of Managements Discussion for further
discussion.
The $6.6 million, or 16.0%, increase in other expenses included the following: $1.5 million of
charges for the Corporations subsidiary banks share, as members of Visa USA, of settled and
pending litigation incurred by Visa, Inc. (Visa) in various lawsuits, a $1.1 million charge for the
write-off of trade name intangible assets resulting from the consolidation of certain bank
subsidiaries, a $1.1 million increase in the provision for customer reward points earned on credit
cards, a $1.3 million increase in costs associated with the disposition and maintenance of
foreclosed real estate, $570,000 in costs associated with the closure of national wholesale
residential mortgage offices at Resource Mortgage and a $504,000 unfavorable net impact of the
change in fair values of derivative financial instruments. These increases were offset by a $1.6
million expense related to the settlement of a lawsuit during 2006.
2006 vs. 2005
Other Income
Excluding investment securities gains, total other income increased $4.8 million, or 3.5%,
including $5.8 million contributed by acquisitions. Excluding acquisitions and investment
securities gains, other income decreased $1.0 million, or 0.7%.
Total service charges on deposit accounts increased $3.6 million, or 8.9%, with acquisitions
contributing $2.3 million. The remaining increase was due to increases of $1.2 million in overdraft
fees and $1.2 million in cash management fees, offset by a $1.1 million decrease in other service
charges on deposit accounts, primarily related to lower fees earned on both personal and commercial
non-interest-bearing and interest-bearing demand accounts. During 2006, the rising interest rate
environment made cash management services more attractive for business customers.
Investment management and trust services increased slightly by $1.8 million, or 5.0%, primarily due
to acquisitions contributing $691,000 and due to increases in trust commission income of $496,000,
or 2.2%, resulting from positive trends within equity markets as well as expanded marketing
initiatives to attract new customers.
Other service charges and fees increased $2.6 million, or 10.6%, due to acquisitions contributing
$2.3 million, increases in letter of credit fees ($921,000, or 21.5%) and debit card fees
($951,000, or 14.7%), offset by decreases in merchant fees ($366,000, or 5.1%). Other income
increased $3.0 million, or 29.0%, primarily due to $2.2 million of gains on sales of branch and
office facilities during 2006.
Gains on sales of loans decreased $3.9 million, or 15.8%, due to the impact of longer-term mortgage
rates, resulting in both decreased volumes of $351.8 million, or 15.3%, and lower spreads on sales
of 17 basis points, offset by a $1.1 million increase contributed by acquisitions.
Investment securities gains increased $814,000, or 12.3%, in 2006. Investment securities gains, net
of realized losses, included realized gains on the sale of equity securities of $7.0 million in
2006, compared to $5.8 million in 2005, and $474,000 and $843,000 in 2006 and 2005, respectively,
on the sale of debt securities, which were generally sold to take advantage of the interest rate
environment.
Other Expenses
Total other expenses increased $49.7 million, or 15.7%, in 2006, including $42.7 million due to
acquisitions.
Salaries and employee benefits increased $32.0 million, or 17.6%, in 2006, with acquisitions
contributing $20.1 million to salaries expense and $4.1 million to employee benefits. Excluding the
impact of acquisitions, salaries expense increased $6.8 million, or 4.7%. The increase was driven
primarily by normal salary increases for existing employees and, to a lesser extent, due to an
increase in the number of full-time employees. Also contributing to the increase in salaries was a
$646,000 increase in stock-based compensation expense and $1.3 million of bonuses accrued under a
new corporate management incentive compensation plan, offset by a $630,000 decrease in bonuses
accrued under pre-existing subsidiary incentive compensation plans. Excluding the impact of
acquisitions, employee benefits increased $1.0 million, or 3.0%, due primarily to increased
healthcare costs of $1.4 million, or 9.2%. Also
33
contributing to the increase was a $626,000, or
8.0%, increase in profit sharing expenses. These increases were offset by decreased costs related
to the Corporations defined benefit pension plan of $1.3 million, or 36.1%, as a result of a $10.7
million contribution to the plan in 2005.
Net occupancy expense increased $7.2 million, or 24.7%, due to acquisitions contributing $5.1
million, the expansion of the branch network, higher maintenance and utility costs, increased rent
expense and depreciation of real property. Equipment expense increased $2.3 million, or 19.4%, in
2006, due to acquisitions contributing $1.8 million, increased depreciation expense for equipment,
higher rent expense related to office equipment and additions from the expansion of the branch
network. A total of 12 and 8 new branch offices were opened in 2006 and 2005, respectively.
Data processing expense decreased $167,000, or 1.3%, due to savings realized from the consolidation
of back office systems of two of the Corporations recently acquired subsidiary banks, offset by
increases of $1.2 million attributable to acquisitions. Advertising expense increased $1.8 million,
or 20.6%, primarily related to acquisitions contributing $1.3 million and due to increased
discretionary promotional campaigns during 2006. Professional fees decreased $336,000, or 6.2%,
primarily related to legal fee recoveries in 2006 related to recoveries of non-accrual loans,
offset by increases of $321,000 attributable to acquisitions.
Other expenses increased $2.4 million, or 5.4%, in 2006. The impact of acquisitions added $4.3
million to other expenses. Excluding acquisitions, the $1.9 million decrease in other expenses was
mainly due to a decrease of $1.0 million in losses recorded in connection with the settlement of a
previously disclosed lawsuit. In addition, in 2005, the Corporation recorded a $600,000 expense for
a loss incurred in a subsidiary banks mortgage operations. Finally, the Corporation realized
certain state tax recoveries in 2006.
Income Taxes
Income taxes decreased $16.9 million, or 21.0%, in 2007 and increased $9.1 million, or 12.7%, in
2006. The Corporations effective tax rate (income taxes divided by income before income taxes) was
29.4%, 30.2% and 30.1% in 2007, 2006 and 2005, respectively. In general, the variances from the 35%
Federal statutory rate consisted of tax-exempt interest income and investments in low and moderate
income housing partnerships (LIH Investments), which generate Federal tax credits. Net credits
associated with LIH investments were $3.7 million, $3.9 million and $4.9 million in 2007, 2006 and
2005, respectively. The additional decrease in the effective rate in 2007 resulted from the
significant losses incurred in 2007 for the Resource Mortgage issues generating a tax benefit at
the Corporations 35% marginal Federal income tax rate.
For additional information regarding income taxes, see Note K, Income Taxes, in the Notes to
Consolidated Financial Statements.
34
FINANCIAL CONDITION
The table below presents a comparative condensed ending balance sheet for the Corporation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
Increase (decrease) |
|
|
|
2007 |
|
|
2006 |
|
|
$ |
|
|
% |
|
|
|
(dollars in thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
381,283 |
|
|
$ |
355,018 |
|
|
$ |
26,265 |
|
|
|
7.4 |
% |
Other earning assets |
|
|
125,137 |
|
|
|
267,230 |
|
|
|
(142,093 |
) |
|
|
(53.2 |
) |
Investment securities |
|
|
3,153,552 |
|
|
|
2,878,238 |
|
|
|
275,314 |
|
|
|
9.6 |
|
Loans, net of allowance |
|
|
11,096,877 |
|
|
|
10,267,439 |
|
|
|
829,438 |
|
|
|
8.1 |
|
Premises and equipment |
|
|
193,296 |
|
|
|
191,401 |
|
|
|
1,895 |
|
|
|
1.0 |
|
Goodwill and intangible assets |
|
|
654,908 |
|
|
|
663,775 |
|
|
|
(8,867 |
) |
|
|
(1.3 |
) |
Other assets |
|
|
318,045 |
|
|
|
295,863 |
|
|
|
22,182 |
|
|
|
7.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
15,923,098 |
|
|
$ |
14,918,964 |
|
|
$ |
1,004,134 |
|
|
|
6.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
10,105,445 |
|
|
$ |
10,232,469 |
|
|
$ |
(127,024 |
) |
|
|
(1.2 |
%) |
Short-term borrowings |
|
|
2,383,944 |
|
|
|
1,680,840 |
|
|
|
703,104 |
|
|
|
41.8 |
|
Long-term debt |
|
|
1,642,133 |
|
|
|
1,304,148 |
|
|
|
337,985 |
|
|
|
25.9 |
|
Other liabilities |
|
|
216,656 |
|
|
|
185,197 |
|
|
|
31,459 |
|
|
|
17.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
14,348,178 |
|
|
|
13,402,654 |
|
|
$ |
945,524 |
|
|
|
7.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
1,574,920 |
|
|
|
1,516,310 |
|
|
|
58,610 |
|
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders Equity |
|
$ |
15,923,098 |
|
|
$ |
14,918,964 |
|
|
$ |
1,004,134 |
|
|
|
6.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets increased $1.0 billion, or 6.7%, to $15.9 billion at December 31, 2007, from $14.9
billion at December 31, 2006. Total loans, net of the allowance for loan losses, increased $829.4
million, or 8.1%. During 2007, proceeds from short and long-term borrowings were used to fund loan
growth, and to a lesser extent, investment security purchases. Total deposits decreased $127.0
million, or 1.2%, to $10.1 billion at December 31, 2007, while total borrowings increased $1.0
billion, or 34.9%.
35
Loans
The following table presents loans outstanding, by type, as of the dates shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(in thousands) |
|
Commercial industrial, financial
and agricultural |
|
$ |
3,427,085 |
|
|
$ |
2,965,186 |
|
|
$ |
2,375,669 |
|
|
$ |
2,273,138 |
|
|
$ |
1,948,968 |
|
Real-estate commercial mortgage |
|
|
3,502,282 |
|
|
|
3,213,809 |
|
|
|
2,831,405 |
|
|
|
2,461,016 |
|
|
|
1,992,650 |
|
Real-estate residential mortgage |
|
|
851,577 |
|
|
|
696,836 |
|
|
|
567,733 |
|
|
|
543,072 |
|
|
|
434,568 |
|
Real-estate home equity |
|
|
1,501,231 |
|
|
|
1,455,439 |
|
|
|
1,205,523 |
|
|
|
1,107,067 |
|
|
|
888,409 |
|
Real-estate construction |
|
|
1,342,923 |
|
|
|
1,428,809 |
|
|
|
851,451 |
|
|
|
595,567 |
|
|
|
307,108 |
|
Consumer |
|
|
500,708 |
|
|
|
523,066 |
|
|
|
520,098 |
|
|
|
488,059 |
|
|
|
498,428 |
|
Leasing and other |
|
|
89,383 |
|
|
|
100,711 |
|
|
|
79,738 |
|
|
|
72,795 |
|
|
|
77,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,215,189 |
|
|
|
10,383,856 |
|
|
|
8,431,617 |
|
|
|
7,540,714 |
|
|
|
6,147,777 |
|
Unearned income |
|
|
(10,765 |
) |
|
|
(9,533 |
) |
|
|
(6,889 |
) |
|
|
(6,799 |
) |
|
|
(7,577 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,204,424 |
|
|
$ |
10,374,323 |
|
|
$ |
8,424,728 |
|
|
$ |
7,533,915 |
|
|
$ |
6,140,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of unearned income, increased $830.1 million, or 8.0%, in 2007, primarily due to
increases in commercial loan and commercial mortgage categories, which together grew $750.4
million, or 12.1%, offset by decreases in construction loans ($85.9 million, or 6.0%) and consumer
loans ($22.4 million, or 4.3%). Increases in residential mortgage loans of $154.7 million, or
22.2%, and in home equity loans of $45.8 million, or 3.1%, also contributed to the increase in
loans. The growth in these types of loans resulted from originations of adjustable rate mortgages
for portfolio and the repurchase of loans by Resource Mortgage.
Approximately $4.8 billion, or 43.2%, of the Corporations loan portfolio was in commercial
mortgage and construction loans at December 31, 2007, compared to 44.8% at December 31, 2006. While
the Corporation does not have a concentration of credit risk with any single borrower or industry,
repayments on loans in these portfolios can be negatively influenced by decreases in real estate
values. The Corporation mitigates this risk through stringent underwriting policies and procedures.
Investment Securities
The following table presents the carrying amount of investment securities held to maturity (HTM)
and available for sale (AFS) as of the dates shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
HTM |
|
|
AFS |
|
|
Total |
|
|
HTM |
|
|
AFS |
|
|
Total |
|
|
HTM |
|
|
AFS |
|
|
Total |
|
|
|
(in thousands) |
|
Equity securities |
|
$ |
|
|
|
$ |
191,725 |
|
|
$ |
191,725 |
|
|
$ |
|
|
|
$ |
165,636 |
|
|
$ |
165,636 |
|
|
$ |
|
|
|
$ |
135,532 |
|
|
$ |
135,532 |
|
U.S. Government securities |
|
|
|
|
|
|
14,536 |
|
|
|
14,536 |
|
|
|
|
|
|
|
17,066 |
|
|
|
17,066 |
|
|
|
|
|
|
|
35,118 |
|
|
|
35,118 |
|
U.S. Government sponsored
agency securities |
|
|
6,478 |
|
|
|
202,523 |
|
|
|
209,001 |
|
|
|
7,648 |
|
|
|
288,465 |
|
|
|
296,113 |
|
|
|
7,512 |
|
|
|
212,650 |
|
|
|
220,162 |
|
State and municipal |
|
|
1,120 |
|
|
|
521,538 |
|
|
|
522,658 |
|
|
|
1,262 |
|
|
|
488,279 |
|
|
|
489,541 |
|
|
|
5,877 |
|
|
|
438,987 |
|
|
|
444,864 |
|
Corporate debt securities |
|
|
25 |
|
|
|
165,982 |
|
|
|
166,007 |
|
|
|
75 |
|
|
|
70,637 |
|
|
|
70,712 |
|
|
|
|
|
|
|
65,834 |
|
|
|
65,834 |
|
Collateralized mortgage
obligations |
|
|
|
|
|
|
594,775 |
|
|
|
594,775 |
|
|
|
|
|
|
|
492,524 |
|
|
|
492,524 |
|
|
|
|
|
|
|
262,503 |
|
|
|
262,503 |
|
Mortgage-backed securities |
|
|
2,662 |
|
|
|
1,452,188 |
|
|
|
1,454,850 |
|
|
|
3,539 |
|
|
|
1,343,107 |
|
|
|
1,346,646 |
|
|
|
4,869 |
|
|
|
1,393,263 |
|
|
|
1,398,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,285 |
|
|
$ |
3,143,267 |
|
|
$ |
3,153,552 |
|
|
$ |
12,524 |
|
|
$ |
2,865,714 |
|
|
$ |
2,878,238 |
|
|
$ |
18,258 |
|
|
$ |
2,543,887 |
|
|
$ |
2,562,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities increased $275.3 million, or 9.6%, to a balance of $3.2 billion at
December 31, 2007. Proceeds from maturities and sales were reinvested in the portfolio based on
balance sheet management considerations, such as the Corporations
36
overall funding position and the
current and expected interest rate environment. The increase over 2006 reflects the pre-purchase
of investments with cash proceeds that are expected to be received over the next six months,
generally from U.S. government sponsored agency mortgage-backed securities. This allowed the
Corporation to obtain rates more favorable than those expected in the near future.
The Corporation classified 99.7% of its investment portfolio as available for sale at December 31,
2007 and, as such, these investments were recorded at their estimated fair values. The net
unrealized loss on non-equity available for sale investment securities decreased from $41.0 million
at December 31, 2006 to $6.5 million at December 31, 2007, generally due to changes in interest
rates.
At December 31, 2007, equity securities consisted of FHLB and other government agency stock ($109.7
million), stocks of other financial institutions ($69.4 million) and mutual funds and other ($12.6
million). Historically, the financial institutions stock portfolio was a source of capital
appreciation and realized gains ($1.8 million in 2007, $7.0 million in 2006 and $5.8 million in
2005). However, this portfolio has experienced recent declines in value consistent with the
industry as a whole, and as of December 31, 2007, the portfolio has net unrealized losses of $23.3
million. Management evaluated the near-term prospects of the issuers in relation to the severity
and duration of the impairment. Based on that evaluation and the Corporations ability and intent
to hold those investments for a reasonable period of time sufficient for a recovery of fair value,
the Corporation does not consider those investments to be other than temporarily impaired at
December 31, 2007.
As of December 31, 2007, the Corporation did not have any collateralized debt obligations in its
investment portfolio, and all of its mortgage-backed securities and collateralized mortgage
obligations were government sponsored agency-guaranteed.
Other Assets
Cash and due from banks increased $26.3 million, or 7.4%. Because of the daily fluctuations that
result in the normal course of business, cash is more appropriately analyzed in terms of average
balances. On an average balance basis, cash and due from banks decreased $6.1 million, or 1.8%,
from $335.9 million in 2006 to $329.8 million in 2007.
Other earning assets decreased $142.1 million, or 53.2%, primarily due to a $135.1 million, or
56.5%, decrease in loans held for sale. The decrease in loans held for sale was due to an increase
in average longer-term mortgage rates during 2006 and the first half of 2007 and the exit from the
national wholesale residential mortgage business at Resource Mortgage.
Premises and equipment increased $1.9 million, or 1.0%, to $193.3 million. The increase reflects
additions primarily for the construction of new branch facilities, offset by the sales of branch
and office facilities during 2007. The Corporation expects to incur approximately $12 million of
capital expenditures related to information technology hardware and software, which will be
purchased from third party vendors, in 2008.
Goodwill and intangible assets decreased $8.9 million, or 1.3%. The decrease was due primarily to
$8.3 million of amortization expense related to intangible assets, and $1.1 million of trade name
intangible asset write-offs recorded in 2007. See also Note F, Goodwill and Intangible Assets, in
the Notes to Consolidated Financial Statements for additional information.
Other assets increased $22.2 million, or 7.5%, to $318.0 million. The increase was primarily due to
a $10.8 million increase in other real estate owned, due to the 2007 Resource Mortgage loan
repurchases, a $7.4 million increase in the deferred tax asset due to the reserve for Resource
Mortgage loans which may be repurchased, and an increase of $6.8 million related to a
reclassification of the overfunded status of the Corporations defined benefit pension plan, which
was curtailed in April 2007. These increases were offset by a $4.8 million decrease in receivables
related to investment security sales and maturities. See also Note L, Employee Benefit Plans, in
the Notes to Consolidated Financial Statements for additional information related to the
Corporations curtailment of the defined benefit pension plan.
Deposits and Borrowings
Deposits decreased $127.0 million, or 1.2%, to $10.1 billion at December 31, 2007. During 2007,
total demand deposits decreased $77.8 million, or 2.2%, savings deposits decreased $155.8 million,
or 6.8%, and time deposits increased $106.5 million, or 2.4%. The
37
increase in time deposits
resulted from the price sensitivity of customers who have taken advantage of favorable interest
rates offered on time deposits.
Short-term borrowings increased $703.1 million, or 41.8%, primarily due to a $650.0 million
increase in overnight FHLB advances and partially due to a $52.8 million increase in short-term
promissory notes and customer repurchase agreements. Long-term debt increased $338.0 million, or
25.9%, primarily due to an increase in FHLB advances to fund loan growth and investment purchases,
as well as the Corporations issuance of $100.0 million of ten-year subordinated notes in May 2007.
As a result of decreases in demand and savings deposits, in late 2007 the Corporation increased its
variable rate funding in the form of short-term borrowings to support continued loan growth and to
fund investment securities purchases. This is in contrast to the trend of lower reliance on
short-term borrowings which occurred throughout the second half of 2006 and the first half of 2007,
which resulted in a decrease in short-term borrowings on an annual average basis, as shown in the
Net Interest Income section of Managements Discussion.
Other Liabilities
Other liabilities increased $31.5 million, or 17.0%. The increase was primarily attributable to a
$7.8 million increase in accrued interest payable related to the increase in time deposit balances,
a $12.8 million increase in the reserve for potential repurchases of residential mortgage loans and
home equity loans sold by Resource Mortgage, and a $4.7 million increase related to the
Corporations reclassification of its reserve for unfunded commitments from the allowance for loan
losses to other liabilities as of December 31, 2007.
Shareholders Equity
Total shareholders equity increased $58.6 million, or 3.9%, to $1.6 billion, or 9.9% of ending
total assets, as of December 31, 2007. This growth was due primarily to 2007 net income of $152.7
million, a $9.1 million reversal of other comprehensive loss due to the curtailment of the defined
benefit pension plan, an increase of $8.5 million related to unrealized holding gains on investment
securities, and $7.5 million of stock issuances. These increases were offset by $103.5 million of
dividends paid to shareholders and $18.2 million of treasury stock purchases.
Total treasury stock purchases were approximately 1.2 million shares in 2007, 1.1 million shares in
2006 and 5.3 million shares in 2005. The Corporation had a stock repurchase plan in place for 1.0
million shares which expired on December 31, 2007. Through December 31, 2007, 135,000 shares had
been repurchased under this plan.
The dividend payout ratio, or dividends per share divided by diluted net income per share, of 68.0%
in 2007 increased from 54.8% in 2006. This growth reflects a lower net income level, while
maintaining a consistent dividend rate.
The Corporation and its subsidiary banks are subject to regulatory capital requirements
administered by various banking regulators. Failure to meet minimum capital requirements can
initiate certain actions by regulators that could have a material effect on the Corporations
financial statements. The regulations require that banks maintain minimum amounts and ratios of
total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and
Tier I capital to average assets (as defined). As of December 31, 2007, the Corporation and each of
its bank subsidiaries met the minimum capital requirements. In addition, all of the Corporations
bank subsidiaries capital ratios exceeded the amounts required to be considered well capitalized
as defined in the regulations. See also Note J, Regulatory Matters, in the Notes to Consolidated
Financial Statements.
38
Contractual Obligations and Off-Balance Sheet Arrangements
The Corporation has various financial obligations that require future cash payments. These
obligations include the payment of liabilities recorded on the Corporations consolidated balance
sheet as well as contractual obligations for purchased services or for operating leases. The
following table summarizes significant contractual obligations to third parties, by type, that were
fixed and determinable at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due In |
|
|
One Year |
|
One to |
|
Three to |
|
Over Five |
|
|
|
|
or Less |
|
Three Years |
|
Five Years |
|
Years |
|
Total |
|
|
(in thousands) |
Deposits with no stated maturity (1) |
|
$ |
5,568,900 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,568,900 |
|
Time deposits (2) |
|
|
3,732,333 |
|
|
|
472,626 |
|
|
|
138,218 |
|
|
|
193,368 |
|
|
|
4,536,545 |
|
Short-term borrowings (3) |
|
|
2,383,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,383,944 |
|
Long-term debt (3) |
|
|
143,490 |
|
|
|
557,997 |
|
|
|
70,244 |
|
|
|
870,402 |
|
|
|
1,642,133 |
|
Operating leases (4) |
|
|
9,008 |
|
|
|
14,408 |
|
|
|
12,208 |
|
|
|
42,992 |
|
|
|
78,616 |
|
Purchase obligations (5) |
|
|
21,516 |
|
|
|
23,532 |
|
|
|
3,887 |
|
|
|
|
|
|
|
48,935 |
|
|
|
|
(1) |
|
Includes demand deposits and savings accounts, which can be withdrawn by
customers at any time. |
|
(2) |
|
See additional information regarding time deposits in Note H, Deposits, in
the Notes to Consolidated Financial Statements. |
|
(3) |
|
See additional information regarding borrowings in Note I, Short-Term
Borrowings and Long-Term Debt, in the Notes to Consolidated Financial Statements. |
|
(4) |
|
See additional information regarding operating leases in Note N, Leases, in
the Notes to Consolidated Financial Statements. |
|
(5) |
|
Includes significant information technology, telecommunication and data
processing outsourcing contracts. Variable obligations, such as those based on
transaction volumes, are not included. |
In addition to the contractual obligations listed in the preceding table, the Corporation is a
party to financial instruments with off-balance sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments include commitments to extend
credit and standby letters of credit, which involve, to varying degrees, elements of credit and
interest rate risk that are not recognized on the consolidated balance sheets. Commitments to
extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Standby letters of credit are conditional commitments issued
to guarantee the financial or performance obligation of a customer to a third party. Commitments
and standby letters of credit do not necessarily represent future cash needs as they may expire
without being drawn.
The following table presents the Corporations commitments to extend credit and letters of credit
as of December 31, 2007 (in thousands):
|
|
|
|
|
Commercial mortgage, construction and land development |
|
$ |
596,169 |
|
Home equity |
|
|
774,159 |
|
Credit card |
|
|
381,732 |
|
Commercial and other |
|
|
2,549,023 |
|
|
|
|
|
Total commitments to extend credit |
|
$ |
4,301,083 |
|
|
|
|
|
|
|
|
|
|
Standby letters of credit |
|
$ |
760,909 |
|
Commercial letters of credit |
|
|
25,974 |
|
|
|
|
|
Total letters of credit |
|
$ |
786,883 |
|
|
|
|
|
39
CRITICAL ACCOUNTING POLICIES
The following is a summary of those accounting policies that the Corporation considers to be most
important to the portrayal of its financial condition and results of operations, as they require
managements most difficult judgments as a result of the need to make estimates about the effects
of matters that are inherently uncertain.
Allowance for Credit Losses The Corporation accounts for the credit risk associated with
its lending activities through the allowance for credit losses. The allowance for credit losses
consists of the allowance for loan losses and the reserve for unfunded lending commitments. The
allowance for loan losses represents managements estimate of losses inherent in the existing loan
portfolio. The reserve for unfunded lending commitments represents managements estimate of losses
inherent in its unfunded loan commitments, the balance of which is included in other liabilities.
The provision for loan losses is the periodic charge to earnings, which is necessary to adjust the
allowance for credit losses to its proper balance. The Corporation assesses the adequacy of its
allowance through a methodology that consists of the following:
|
- |
|
Identifying loans for individual review under Statement 114. In general, these consist
of large balance commercial loans and commercial mortgages that are rated less than
satisfactory based upon the Corporations internal credit-rating process. |
|
|
- |
|
Assessing whether the loans identified for review under Statement 114 are impaired.
That is, whether it is probable that all amounts will not be collected according to the
contractual terms of the loan agreement. |
|
|
- |
|
For loans reviewed under Statement 114, calculating the estimated fair value, using
observable market prices, discounted cash flows or the value of the underlying
collateral. |
|
|
- |
|
Classifying all non-impaired large balance loans based on credit risk ratings and
allocating an allowance for loan losses based on appropriate factors, including recent
loss history for similar loans. |
|
|
- |
|
Identifying all smaller balance homogeneous loans for evaluation collectively under the
provisions of Statement 5. In general, these loans include residential mortgages,
consumer loans, installment loans, smaller balance commercial loans and mortgages and
lease receivables. |
|
|
- |
|
Statement 5 loans are segmented into groups with similar characteristics and an
allowance for loan losses is allocated to each segment based on recent loss history and
other relevant information. |
|
|
- |
|
Reviewing the results to determine the appropriate balance of the allowance for credit
losses. This review gives additional consideration to factors such as the mix of loans in
the portfolio, the balance of the allowance relative to total loans and non-performing
assets, trends in the overall risk profile of the portfolio, trends in delinquencies and
non-accrual loans and local and national economic conditions. |
|
|
- |
|
An unallocated allowance is maintained to recognize the inherent imprecision in estimating and measuring loss exposure. |
|
|
- |
|
Documenting the results of its review in accordance with SAB 102. |
The allowance review methodology is based on information known at the time of the review. Changes
in factors underlying the assessment could have a material impact on the amount of the allowance
that is necessary and the amount of provision to be charged against earnings. Such changes could
impact future results.
Accounting for Business Combinations The Corporation accounts for all business
acquisitions using the purchase method of accounting as required by Statement of Financial
Accounting Standards No. 141, Business Combinations (Statement 141). Purchase accounting requires
the purchase price to be allocated to the estimated fair values of the assets acquired and
liabilities assumed. It also requires assessing the existence of and, if necessary, assigning a
value to certain intangible assets. The remaining excess purchase price over the fair value of net
assets acquired is recorded as goodwill.
The purchase price is established as the value of securities issued for the acquisition, cash
consideration paid and certain acquisition-related expenses. The fair values of assets acquired and
liabilities assumed are typically established through appraisals, observable market values or
discounted cash flows. Management has engaged independent third-party valuation experts to assist
in valuing certain assets, particularly intangibles. Other assets and liabilities are generally
valued using the Corporations internal asset/liability modeling system. The assumptions used and
the final valuations, whether prepared internally or by a third party, are reviewed by
40
management. Due to the complexity of purchase accounting, final determinations of values can be
time consuming and, occasionally, amounts included in the Corporations consolidated balance sheets
and consolidated statements of income are based on preliminary estimates of value.
Goodwill and Intangible Assets Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (Statement 142) addresses the accounting for goodwill and
intangible assets subsequent to acquisition. Intangible assets are amortized over their estimated
lives. Some intangible assets have indefinite lives and are, therefore, not amortized. All
intangible assets must be evaluated for impairment if certain events occur. Any impairment
write-downs are recognized as expense on the consolidated statements of income.
Goodwill is not amortized to expense, but is evaluated at least annually for impairment. The
Corporation completes its annual goodwill impairment test as of October 31st of each year. The
Corporation tests for impairment by first allocating its goodwill and other assets and liabilities,
as necessary, to defined reporting units. A fair value is then determined for each reporting unit.
If the fair values of the reporting units exceed their book values, no write-down of the recorded
goodwill is necessary. If the fair values are less than the book values, an additional valuation
procedure is necessary to assess the proper carrying value of the goodwill. The Corporation
determined that no impairment write-offs were necessary during 2007, 2006 and 2005.
Business unit valuation is inherently subjective, with a number of factors based on assumptions and
management judgments. Among these are future growth rates for the reporting units, selection of
comparable market transactions, discount rates and earnings capitalization rates. Changes in
assumptions and results due to economic conditions, industry factors and reporting unit performance
and cash flow projections could result in different assessments of the fair values of reporting
units and could result in impairment charges in the future.
If an event occurs or circumstances change that would more likely than not reduce the fair value of
a reporting unit below its carrying amount, an impairment test between annual tests is necessary.
Such events may include adverse changes in legal factors or in the business climate, adverse
actions by a regulator, unauthorized competition, the loss of key employees, or similar events. The
Corporation has not performed an interim goodwill impairment test during the past three years as no
such events have occurred. However, such an interim test could be necessary in the future.
Income Taxes The provision for income taxes is based upon income before income taxes,
adjusted for the effect of certain tax-exempt income and non-deductible expenses. In addition,
certain items of income and expense are reported in different periods for financial reporting and
tax return purposes. The tax effects of these temporary differences are recognized currently in the
deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on
the difference between the financial statement and income tax bases of assets and liabilities using
the applicable enacted marginal tax rate.
The Corporation must also evaluate the likelihood that deferred tax assets will be recovered from
future taxable income. If any such assets are more likely than not to not be recovered, a valuation
allowance must be recognized. The Corporation recorded a valuation
allowance of $7.2 million as of
December 31, 2007 for certain state net operating losses that are not expected to be recovered. The
assessment of the carrying value of deferred tax assets is based on certain assumptions, changes in
which could have a material impact on the Corporations consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). The interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. Specifically, the interpretation prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return.
In May 2007, the FASB issued Interpretation No. FIN 48-1, Definition of Settlement in FASB
Interpretation No. 48 (Staff Position No. FIN 48-1). Staff Position No. FIN 48-1 provides guidance
on how to determine whether a tax position is effectively settled for the purpose of recognizing
previously unrecognized tax benefits. Staff Position No. FIN 48-1 is effective retroactively to
January 1, 2007. The implementation of this standard did not have an impact on the consolidated
financial statements.
41
The Corporation adopted the provisions of FIN 48 on January 1, 2007. As a result of adopting FIN
48, the existing reserve for unrecognized tax positions, which was recorded in other liabilities,
was reduced by $220,000, with an offsetting increase to retained earnings. As of December 31, 2007,
the Corporations reserve for unrecognized tax positions was $5.8 million.
See also Note K, Income Taxes, in the Notes to Consolidated Financial Statements.
Recent Accounting Pronouncements
In September 2006, the FASB ratified Emerging Issues Task Force (EITF) Issue 06-4, Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements (EITF 06-4). EITF 06-4 addresses accounting for endorsement split-dollar life
insurance arrangements that provide a benefit to an employee that extends to postretirement
periods. EITF 06-4 would require that the postretirement benefit aspects of an endorsement-type
split-dollar life insurance arrangement be recognized as a liability by the employer if that
obligation has not been settled through the related insurance arrangement. EITF 06-4 is effective
for fiscal years beginning after December 15, 2007, or January 1, 2008 for the Corporation. The
adoption of EITF 06-4 is not expected to have a material impact on the consolidated financial
statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurement (Statement 157). Statement 157 defines fair value, establishes a framework for
measuring fair value in U.S. GAAP, and expands disclosure requirements for fair value measurements.
Statement 157 does not require any new fair value measurements and is effective for financial
statements issued for fiscal years beginning after November 15, 2007, or January 1, 2008 for the
Corporation. The adoption of Statement 157 is not expected to have a material impact on the
consolidated financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115 (Statement 159).
Statement 159 permits entities to choose to measure many financial instruments and certain other
items at fair value and amends Statement 115 to, among other things, require certain disclosures
for amounts for which the fair value option is applied. Additionally, this standard provides that
an entity may reclassify held-to-maturity and available-for-sale securities to the trading account
when the fair value option is elected for such securities, without calling into question the intent
to hold other securities to maturity in the future. This standard is effective as of the beginning
of an entitys first fiscal year that begins after November 15, 2007, or January 1, 2008 for the
Corporation. The adoption of Statement 159 is not expected to have a material impact on the
consolidated financial statements.
In March 2007, the FASB ratified EITF Issue 06-10, Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements
(EITF 06-10). EITF 06-10 addresses accounting for collateral assignment split-dollar life insurance
arrangements that provide a benefit to an employee that extends to postretirement periods. EITF
06-10 provides guidance for determining the liability for the postretirement benefit aspects of
collateral assignment-type split-dollar life insurance arrangements, as well as the recognition and
measurement of the associated asset on the basis of the terms of the collateral assignment
agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007, or January
1, 2008 for the Corporation. The adoption of EITF 06-10 is not expected to have a material impact
on the consolidated financial statements.
In June 2007, the FASB ratified EITF Issue 06-11, Accounting for Income Tax Benefits of Dividends
on Share-Based Payment Awards (EITF 06-11). EITF 06-11 requires that tax benefits associated with
dividends on share-based payment awards be recorded as a component of additional paid-in capital.
EITF 06-11 is effective, on a prospective basis, for fiscal years beginning after December 15,
2007, or January 1, 2008 for the Corporation. The adoption of EITF 06-11 is not expected to have a
material impact on the consolidated financial statements.
In November 2007, the SEC issued Staff Accounting Bulletin No. 109 (Topic 5DD), Written Loan
Commitments Recorded at Fair Value Through Earnings (SAB 109). SAB 109 provides an interpretation
of the SECs views regarding derivative loan commitments that are accounted for at fair value
through earnings under U.S. GAAP. Specifically, the interpretation requires registrants that record
fair value measurements of derivative loan commitments through earnings also include the future
cash flows related to the loans servicing rights. SAB 109 is effective for all derivative loan
commitments issued or modified in fiscal quarters beginning after December 15, 2007, or January 1,
2008 for the Corporation. The adoption of SAB 109 is not expected to have a material impact on the
consolidated financial statements.
42
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised
2007), Business Combinations (Statement 141R). The statement establishes principles and
requirements for how an acquirer: recognizes and measures in its financial statement the
identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from
a bargain purchase; and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. Statement 141R
is effective for all business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008, or January
1, 2009 for the Corporation. This standard does not impact acquisitions consummated prior to
December 31, 2008.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements (Statement 160), which establishes
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The statement is effective for periods beginning on or after
December 15, 2008, or January 1, 2009 for the Corporation. The Corporation is currently evaluating
the impact of Statement 160 on the consolidated financial statements.
43
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to economic loss that arises from changes in the values of certain
financial instruments. The types of market risk exposures generally faced by financial institutions
include interest rate risk, equity market price risk, foreign currency risk and commodity price
risk. Due to the nature of its operations, only equity market price risk and interest rate risk are
significant to the Corporation.
Equity Market Price Risk
Equity market price risk is the risk that changes in the values of equity investments could have a
material impact on the financial position or results of operations of the Corporation. The
Corporations equity investments consist of common stocks of publicly traded financial
institutions, U.S. Government sponsored agency stocks and money market mutual funds. The equity
investments most susceptible to equity market price risk are the financial institutions stocks,
which had a cost basis of approximately $92.7 million and a fair value of $69.4 million at December
31, 2007. Gross unrealized gains and losses in this portfolio were approximately $281,000 and $23.6
million at December 31, 2007, respectively.
Although the carrying value of the financial institutions stocks accounted for only 0.4% of the
Corporations total assets, the Corporation has a history of realizing gains from this portfolio.
However, significant declines in the values of financial institution stocks held in this portfolio
have reduced the likelihood of realizing significant gains in the near term. In addition, if the
values of the stocks held in this portfolio continue to decline and there is an indication that the
decline is other than temporary, the Corporation may be required to write-down the values of
financial institution stocks in the future, depending on the facts and circumstances surrounding
the decrease in the fair value of each individual financial institutions stock.
Management continuously monitors the fair value of its equity investments and evaluates current
market conditions and operating results of the companies. Periodic sale and purchase decisions are
made based on this monitoring process. None of the Corporations equity securities are classified
as trading. Future cash flows from these investments are not provided in the table on page 48 as
such investments do not have maturity dates.
The Corporation has evaluated, based on existing accounting guidance, whether any unrealized losses
on individual equity investments constituted other than temporary impairment, which would require a
write-down through a charge to earnings. Based on the results of such evaluations, the Corporation
recorded write-downs of $292,000 in 2007, $122,000 in 2006 and $65,000 in 2005 for specific equity
securities which were deemed to exhibit other than temporary impairment in value. Additional
impairment charges may be necessary depending upon the performance of the equity markets in general
and the performance of the individual investments held by the Corporation. See also Note C,
Investment Securities, in the Notes to Consolidated Financial Statements.
In addition to its equity portfolio, the Corporations investment management and trust services
revenue could be impacted by fluctuations in the securities markets. A portion of the Corporations
trust revenue is based on the value of the underlying investment portfolios. If securities values
decline, the Corporations revenue could be negatively impacted. In addition, the ability of the
Corporation to sell its equities brokerage services is dependent, in part, upon consumers level of
confidence in the outlook for rising securities prices.
Interest Rate Risk, Asset/Liability Management and Liquidity
Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on
the Corporations liquidity position and could affect its ability to meet obligations and continue
to grow. Second, movements in interest rates can create fluctuations in the Corporations net
interest income and changes in the economic value of its equity.
The Corporation employs various management techniques to minimize its exposure to interest rate
risk. An Asset/Liability Management Committee (ALCO), consisting of key financial and senior
management personnel, meets on a bi-weekly basis. The ALCO is responsible for reviewing the
interest rate sensitivity position of the Corporation, approving asset and liability management
policies, and overseeing the formulation and implementation of strategies regarding balance sheet
positions and earnings. The primary goal of asset/liability management is to address the liquidity
and net interest income risks noted above.
From a liquidity standpoint, the Corporation must maintain a sufficient level of liquid assets to
meet the cash needs of its customers, who, as depositors, may want to withdraw funds or who, as
borrowers, need credit availability. Liquidity is provided on a continuous
44
basis through scheduled and unscheduled principal and interest payments on outstanding loans and
investments and through the availability of deposits and borrowings. The Corporation also maintains
secondary sources that provide liquidity on a secured and unsecured basis to meet short-term needs.
The Corporations sources and uses of cash were discussed in general terms in the Overview
section of Managements Discussion. The consolidated statements of cash flows provide additional
information. The Corporation generated $304.7 million in cash from operating activities during
2007, mainly due to net income and the proceeds from the sales of mortgage loans held for sale
exceeding the originations of mortgage loans held for sale. Investing activities resulted in a net
cash outflow of $1.1 billion in 2007 due to the purchase of investment securities and the net
increase in loans exceeding the proceeds from sales and maturities of investments. Financing
activities resulted in net cash proceeds of $800.2 million in 2007, compared to net cash proceeds
of $911.8 million in 2006 as net funds provided by additions of long-tern debt and short-term
borrowings and increases in time deposits exceeded repayments of long-term debt, decreases in
demand and savings accounts, and shareholder dividends.
Liquidity must also be managed at the Fulton Financial Corporation Parent Company level. For safety
and soundness reasons, banking regulations limit the amount of cash that can be transferred from
subsidiary banks to the Parent Company in the form of loans and dividends. Generally, these
limitations are based on the subsidiary banks regulatory capital levels and their net income. The
Parent Company meets its cash needs through dividends and loans from subsidiary banks, and through
external borrowings.
In 2007, the Parent Company entered into a revolving line of credit agreement with an unaffiliated
bank. Under the terms of the agreement, the Parent Company can borrow up to $100.0 million with
interest calculated based on a short-term London Interbank Offering Rate (LIBOR) repriced daily.
The credit agreement requires the Corporation to maintain certain financial ratios related to
capital strength and earnings. As of December 31, 2007, there were no amounts outstanding under
this agreement. The Corporation was in compliance with all required covenants under the credit
agreement as of December 31, 2007.
In May 2007, the Corporation issued $100.0 million of ten-year subordinated notes, which mature on
May 1, 2017 and carry a fixed rate of 5.75%, and an effective rate of approximately 5.96% as a
result of issuance costs. Interest is paid semi-annually in May and November of each year. In
January 2006, the Corporation purchased all of the common stock of a new Delaware business trust,
Fulton Capital Trust I, which was formed for the purpose of issuing $150.0 million of trust
preferred securities at an effective rate of approximately 6.50%. In connection with this
transaction, the Parent Company issued $154.6 million of junior subordinated deferrable interest
debentures to the trust. These debentures carry the same rate and mature on February 1, 2036. In
2005, the Corporation issued $100.0 million of ten-year subordinated notes, which mature April 1,
2015 and carry a fixed rate of 5.35% and an effective rate of 5.49% as a result of issuance costs.
Interest is paid semi-annually.
These borrowings, most notably the revolving line of credit agreement, supplement the liquidity
available from subsidiaries through dividends and provide some flexibility in Parent Company cash
management. Management continues to monitor the liquidity and capital needs of the Parent Company
and will implement appropriate strategies, as necessary, to remain well capitalized and to meet its
cash needs.
At December 31, 2007, liquid assets (defined as cash and due from banks, short-term investments,
Federal funds sold, mortgages available for sale, securities available for sale, and
non-mortgage-backed securities held to maturity due in one year or less) totaled $3.6 billion, or
22.9% of total assets. This level of liquid assets compares to $3.5 billion, or 23.2% of total
assets, at December 31, 2006.
45
The following tables present the expected maturities of investment securities at December 31, 2007
and the weighted average yields of such securities (calculated based on historical cost):
HELD TO MATURITY (at amortized cost)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MATURING |
|
|
|
|
|
|
|
|
|
|
|
After One But |
|
|
After Five But |
|
|
|
|
|
|
Within One Year |
|
|
Within Five Years |
|
|
Within Ten Years |
|
|
After Ten Years |
|
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
|
(dollars in thousands) |
|
U.S. Government
sponsored
agency securities |
|
$ |
|
|
|
|
|
|
|
$ |
6,478 |
|
|
|
4.50 |
% |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
State and municipal (1) |
|
|
142 |
|
|
|
4.16 |
|
|
|
978 |
|
|
|
6.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other securities |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
167 |
|
|
|
3.53 |
% |
|
$ |
7,456 |
|
|
|
4.72 |
% |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities (2) |
|
$ |
2,662 |
|
|
|
6.48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVAILABLE FOR SALE (at estimated fair value)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MATURING |
|
|
|
|
|
|
|
|
|
|
|
After One But |
|
|
After Five But |
|
|
|
|
|
|
Within One Year |
|
|
Within Five Years |
|
|
Within Ten Years |
|
|
After Ten Years |
|
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
|
(dollars in thousands) |
|
U.S. Government securities |
|
$ |
14,536 |
|
|
|
5.00 |
% |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
U.S. Government sponsored
agency securities (3) |
|
|
32,841 |
|
|
|
4.66 |
|
|
|
165,026 |
|
|
|
5.08 |
|
|
|
3,800 |
|
|
|
5.13 |
|
|
|
856 |
|
|
|
6.68 |
|
State and municipal (1) |
|
|
32,931 |
|
|
|
4.77 |
|
|
|
309,238 |
|
|
|
4.81 |
|
|
|
28,678 |
|
|
|
6.61 |
|
|
|
150,691 |
|
|
|
6.73 |
|
Other securities |
|
|
2,285 |
|
|
|
6.20 |
|
|
|
2,938 |
|
|
|
6.97 |
|
|
|
34,509 |
|
|
|
6.07 |
|
|
|
126,250 |
|
|
|
7.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
82,593 |
|
|
|
4.81 |
% |
|
$ |
477,202 |
|
|
|
4.91 |
% |
|
$ |
66,987 |
|
|
|
6.24 |
% |
|
$ |
277,797 |
|
|
|
6.92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage
obligations
(2) |
|
$ |
594,775 |
|
|
|
5.35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
(2) |
|
$ |
1,452,188 |
|
|
|
4.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Weighted average yields on tax-exempt securities have been computed on a fully tax-equivalent
basis assuming a tax rate of 35% and statutory interest expense disallowances. |
|
(2) |
|
Maturities for mortgage-backed securities and collateralized mortgage obligations are
dependent upon the interest rate environment and prepayments on the underlying loans. For the
purpose of this table, the entire balance and weighted average rate is shown in one period. |
|
(3) |
|
Includes Small Business Administration securities, whose maturities are dependent upon
prepayments on the underlying loans. For the purpose of this table, amounts are based upon
contractual maturities. |
The Corporations investment portfolio consists mainly of mortgage-backed securities and
collateralized mortgage obligations which have stated maturities that may differ from actual
maturities due to borrowers ability to prepay obligations. Cash flows from such investments are
dependent upon the performance of the underlying mortgage loans, and are generally influenced by
the level of interest rates. As rates increase, cash flows generally decrease as prepayments on the
underlying mortgage loans decrease. As rates decrease, cash flows generally increase as prepayments
increase.
46
The following table presents the approximate contractual maturity and interest rate sensitivity of
certain loan types, excluding consumer loans and leases, subject to changes in interest rates as of
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One |
|
|
|
|
|
|
|
|
|
One Year |
|
|
Through |
|
|
More Than |
|
|
|
|
|
|
or Less |
|
|
Five Years |
|
|
Five Years |
|
|
Total |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Commercial, financial and agricultural: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate |
|
$ |
1,721,417 |
|
|
$ |
546,461 |
|
|
$ |
234,115 |
|
|
$ |
2,501,993 |
|
Fixed rate |
|
|
308,210 |
|
|
|
483,352 |
|
|
|
133,530 |
|
|
|
925,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,029,627 |
|
|
$ |
1,029,813 |
|
|
$ |
367,645 |
|
|
$ |
3,427,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real-estate mortgage: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate |
|
$ |
826,614 |
|
|
$ |
1,876,348 |
|
|
$ |
1,301,157 |
|
|
$ |
4,004,119 |
|
Fixed rate |
|
|
455,635 |
|
|
|
1,054,141 |
|
|
|
341,195 |
|
|
|
1,850,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,282,249 |
|
|
$ |
2,930,489 |
|
|
$ |
1,642,352 |
|
|
$ |
5,855,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real-estate construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate |
|
$ |
949,959 |
|
|
$ |
144,220 |
|
|
$ |
49,519 |
|
|
$ |
1,143,698 |
|
Fixed rate |
|
|
68,823 |
|
|
|
60,525 |
|
|
|
69,877 |
|
|
|
199,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,018,782 |
|
|
$ |
204,745 |
|
|
$ |
119,396 |
|
|
$ |
1,342,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From a funding standpoint, even though the Corporation has experienced notable changes in the
composition and interest sensitivity of its core deposit base, it has been able to rely on this
base to provide needed liquidity. In addition, the Corporation issues certificates of deposits in
various denominations, including jumbo time deposits, repurchase agreements and short-term
borrowings as potential sources of liquidity.
Contractual maturities of time deposits of $100,000 or more outstanding at December 31, 2007 are as
follows (in thousands):
|
|
|
|
|
Three months or less |
|
$ |
485,929 |
|
Over three through six months |
|
|
425,847 |
|
Over six through twelve months |
|
|
335,075 |
|
Over twelve months |
|
|
145,560 |
|
|
|
|
|
Total |
|
$ |
1,392,411 |
|
|
|
|
|
Each of the Corporations subsidiary banks is a member of the FHLB and has access to FHLB overnight
and term credit facilities. At December 31, 2007, the Corporation had $1.9 billion in overnight and
term advances outstanding from the FHLB with an additional $751.2 million of borrowing capacity
(including both short-term funding on its lines of credit and long-term borrowings). This
availability, along with Federal funds lines at various correspondent banks, provides the
Corporation with additional liquidity.
47
The following table provides information about the Corporations interest rate sensitive financial
instruments. The table presents expected cash flows and weighted average rates for each significant
interest rate sensitive financial instrument, by expected maturity period (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity Period |
|
|
|
|
|
Estimated |
|
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
Beyond |
|
Total |
|
Fair Value |
Fixed rate loans (1) |
|
$ |
1,006,084 |
|
|
$ |
722,089 |
|
|
$ |
523,740 |
|
|
$ |
357,721 |
|
|
$ |
248,789 |
|
|
$ |
554,477 |
|
|
$ |
3,412,900 |
|
|
$ |
3,404,838 |
|
Average rate |
|
|
6.61 |
% |
|
|
6.47 |
% |
|
|
6.65 |
% |
|
|
6.82 |
% |
|
|
6.82 |
% |
|
|
6.47 |
% |
|
|
6.60 |
% |
|
|
|
|
Floating rate loans (1) (7) |
|
|
3,528,533 |
|
|
|
943,024 |
|
|
|
692,669 |
|
|
|
567,324 |
|
|
|
466,129 |
|
|
|
1,588,467 |
|
|
|
7,786,146 |
|
|
|
7,785,853 |
|
Average rate |
|
|
7.45 |
% |
|
|
7.31 |
% |
|
|
7.40 |
% |
|
|
7.43 |
% |
|
|
6.94 |
% |
|
|
6.72 |
% |
|
|
7.24 |
% |
|
|
|
|
|
Fixed rate investments (2) |
|
|
681,565 |
|
|
|
437,012 |
|
|
|
554,037 |
|
|
|
221,725 |
|
|
|
219,988 |
|
|
|
700,652 |
|
|
|
2,814,979 |
|
|
|
2,813,492 |
|
Average rate |
|
|
4.24 |
% |
|
|
4.23 |
% |
|
|
3.88 |
% |
|
|
4.48 |
% |
|
|
4.95 |
% |
|
|
5.54 |
% |
|
|
4.56 |
% |
|
|
|
|
Floating rate investments (2) |
|
|
1,208 |
|
|
|
60 |
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
158,495 |
|
|
|
160,263 |
|
|
|
155,360 |
|
Average rate |
|
|
4.72 |
% |
|
|
5.94 |
% |
|
|
6.63 |
% |
|
|
|
|
|
|
|
|
|
|
5.95 |
% |
|
|
5.94 |
% |
|
|
|
|
|
Other interest-earning assets |
|
|
125,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,137 |
|
|
|
125,137 |
|
Average rate |
|
|
6.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,342,527 |
|
|
$ |
2,102,185 |
|
|
$ |
1,770,946 |
|
|
$ |
1,146,770 |
|
|
$ |
934,906 |
|
|
$ |
3,002,091 |
|
|
$ |
14,299,425 |
|
|
$ |
14,284,680 |
|
Average rate |
|
|
6.85 |
% |
|
|
6.38 |
% |
|
|
6.08 |
% |
|
|
6.67 |
% |
|
|
6.44 |
% |
|
|
6.36 |
% |
|
|
6.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate deposits (3) |
|
$ |
3,742,002 |
|
|
$ |
323,267 |
|
|
$ |
146,335 |
|
|
$ |
82,034 |
|
|
$ |
51,470 |
|
|
$ |
159,615 |
|
|
$ |
4,504,723 |
|
|
$ |
4,512,434 |
|
Average rate |
|
|
4.60 |
% |
|
|
4.29 |
% |
|
|
4.40 |
% |
|
|
4.75 |
% |
|
|
4.39 |
% |
|
|
4.38 |
% |
|
|
4.56 |
% |
|
|
|
|
Floating rate deposits (4) |
|
|
1,688,576 |
|
|
|
259,135 |
|
|
|
259,135 |
|
|
|
245,664 |
|
|
|
238,509 |
|
|
|
2,909,827 |
|
|
|
5,600,846 |
|
|
|
5,600,847 |
|
Average rate |
|
|
2.48 |
% |
|
|
0.96 |
% |
|
|
0.96 |
% |
|
|
0.86 |
% |
|
|
0.80 |
% |
|
|
0.63 |
% |
|
|
1.24 |
% |
|
|
|
|
|
Fixed rate borrowings (5) |
|
|
183,094 |
|
|
|
199,107 |
|
|
|
354,131 |
|
|
|
25,108 |
|
|
|
45,098 |
|
|
|
481,868 |
|
|
|
1,288,406 |
|
|
|
1,331,490 |
|
Average rate |
|
|
5.46 |
% |
|
|
4.66 |
% |
|
|
5.36 |
% |
|
|
5.08 |
% |
|
|
4.96 |
% |
|
|
5.48 |
% |
|
|
5.29 |
% |
|
|
|
|
Floating rate borrowings (6) |
|
|
2,380,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
356,930 |
|
|
|
2,737,328 |
|
|
|
2,737,328 |
|
Average rate |
|
|
4.14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.92 |
% |
|
|
4.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,994,070 |
|
|
$ |
781,509 |
|
|
$ |
759,601 |
|
|
$ |
352,806 |
|
|
$ |
335,077 |
|
|
$ |
3,908,240 |
|
|
$ |
14,131,303 |
|
|
$ |
14,182,099 |
|
Average rate |
|
|
4.03 |
% |
|
|
3.28 |
% |
|
|
3.67 |
% |
|
|
2.07 |
% |
|
|
1.91 |
% |
|
|
1.68 |
% |
|
|
3.22 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts are based on contractual payments and maturities, adjusted for expected prepayments. |
|
(2) |
|
Amounts are based on contractual maturities; adjusted for expected prepayments on
mortgage-backed securities, collateralized mortgage obligations and expected calls on agency
and municipal securities. |
|
(3) |
|
Amounts are based on contractual maturities of time deposits.
|
|
(4) |
|
Estimated based on history of deposit flows.
|
|
(5) |
|
Amounts are based on contractual maturities of debt instruments, adjusted for possible calls. |
|
(6) |
|
Amounts include Federal funds purchased, short-term promissory notes, floating FHLB advances
and securities sold under agreements to repurchase, which mature in less than 90 days, in
addition to junior subordinated deferrable interest debentures. |
|
(7) |
|
Line of credit amounts are based on historical cash flow assumptions, with an average life of
approximately 5 years. |
The preceding table and discussion addressed the liquidity implications of interest rate risk and
focused on expected cash flows from financial instruments. Expected maturities, however, do not
necessarily reflect the net interest income impact of interest rate changes. Certain financial
instruments, such as adjustable rate loans, have repricing periods that differ from expected cash
flows. Fair market value adjustments related to acquisitions are not included in the preceding
table.
In addition to the interest rate sensitive financial instruments included in the preceding table,
the Corporation also had interest rate swaps with a notional amount of $248.0 million as of
December 31, 2007. These swaps were used to hedge certain long-term fixed rate certificates of
deposit. The terms of the certificates of deposit and the interest rate swaps are similar and were
committed to simultaneously. Under the terms of the swap agreements, the Corporation is the fixed
rate receiver and the floating rate payer (generally tied to the three-month LIBOR, a common index
used for setting rates between financial institutions). The combination of the interest rate swaps
and the issuance of the certificates of deposit generates long-term floating rate funding for the
Corporation. As of December 31, 2007, the Corporations weighted average receive and pay rates were
4.72% and 4.89%, respectively.
48
Included within the $7.8 billion of floating rate loans above, are $3.4 billion, or 43% of the
total, that float with the prime interest rate, $3.6 billion, or 46%, of adjustable rate loans, and
$800.0 million of loans which float with other interest rates, primarily LIBOR. The $3.6 billion of
adjustable rate loans include loans that are fixed rate instruments for a certain period of time,
and then convert to floating rates. The following table presents the percentage of adjustable rate
loans, stratified by their initial fixed term:
|
|
|
|
|
|
|
Percent of Total |
|
|
Adjustable Rate |
Fixed Rate Term |
|
Loans |
One year |
|
|
30.6 |
% |
Two years |
|
|
21.1 |
|
Three years |
|
|
19.2 |
|
Four years |
|
|
14.6 |
|
Five years |
|
|
10.9 |
|
Greater than five years |
|
|
3.6 |
|
The Corporation uses three complementary methods to measure and manage interest rate risk. They are
static gap analysis, simulation of earnings, and estimates of economic value of equity. Using these
measurements in tandem provides a reasonably comprehensive summary of the magnitude of interest
rate risk in the Corporation, level of risk as time evolves, and exposure to changes in interest
rate relationships.
Static gap provides a measurement of repricing risk in the Corporations balance sheet as of a
point in time. This measurement is accomplished through stratification of the Corporations assets
and liabilities into repricing periods. The sum of assets and liabilities in each of these periods
are compared for mismatches within that maturity segment. Core deposits having no contractual
maturities are placed into repricing periods based upon historical balance performance. Repricing
for mortgage loans, mortgage-backed securities and collateralized mortgage obligations includes the
effect of expected cash flows. Estimated prepayment effects are applied to these balances based
upon industry projections for prepayment speeds. The Corporations policy limits the cumulative
six-month ratio of rate sensitive assets to rate sensitive liabilities (RSA/RSL) to a range of 0.85
to 1.00. During the fourth quarter of 2007, economic forecasts became heavily biased toward a more
protracted period of declining interest rates. As a result, the Corporation undertook measures to
mitigate the negative impact of declining interest rates on net interest income. Such measures
included, but were not limited to, increased emphasis on shorter duration wholesale funding sources
and decreased emphasis on higher-rate, longer duration retail certificates of deposit. While these
efforts were successful in reducing the Corporations exposure to declining interest rates, greater
than anticipated declines in retail certificates of deposits resulted in a cumulative six-month gap
position that was slightly outside of policy limits at December 31, 2007. The cumulative six-month
gap as of December 31, 2007 was a negative 8.5% and the cumulative six-month RSA/RSL was 0.83. By
January 31, 2008, however, this policy exception was corrected.
It is important to note that static gap analysis does not give effect to prepayments or extensions
of loans as a result of changes in general market rates. Moreover, the static gap position does not
indicate the opportunities to reprice assets and liabilities within certain time frames, or account
for timing differences that occur during periods of repricing. Consequently, the Corportion also
uses a simulation analysis to assess and manage its interest rate risk. Net interest income
simulation results, as of December 31, 2007 indicated a very neutral position in both rising and
declining interest rate environments.
The simulation analysis measures the potential change in earnings over a one-year time horizon and
in the economic value of portfolio equity, captures optionality factors such as call features
embedded in the investment portfolio and actual or implied caps or floors embedded in loan and
deposit product pricing, and includes assumptions as to the timing and magnitude of movements in
interest rates associated with the Corporations variable rate funding sources.
A variety of interest rate scenarios are used to measure the effects of sudden and gradual
movements upward and downward in the yield curve. These results are compared to the results
obtained in a flat or unchanged interest rate scenario. Simulation of earnings is used primarily to
measure the Corporations short-term earnings exposure to rate movements. The Corporations policy
limits the potential exposure of net interest income to 10% of the base case net interest income
for a 100 basis point shock in interest rates, 15% for a 200 basis point shock and 20% for a 300
basis point shock. A shock is an immediate upward or downward movement of interest rates across
the yield curve based upon changes in the prime rate. The shocks do not take into account changes
in customer
49
behavior that could result in changes to mix and/or volumes in the balance sheet nor do they account for
competitive pricing over the forward 12-month period. The following table summarizes the expected
impact of interest rate shocks on net interest income:
|
|
|
|
|
|
|
Annual change |
|
|
|
|
in net interest |
|
|
Rate Shock |
|
income |
|
% Change |
+300 bp
|
|
- $ 3.5 million
|
|
-0.7% |
+200 bp
|
|
- $ 2.3 million
|
|
-0.5% |
+100 bp
|
|
- $ 1.2 million
|
|
-0.2% |
-100 bp
|
|
- $ 0.6 million
|
|
-0.1% |
-200 bp
|
|
- $ 5.3 million
|
|
-1.0% |
-300 bp
|
|
- $ 11.2 million
|
|
-2.2% |
Economic value of equity estimates the discounted present value of asset and liability cash flows.
Discount rates are based upon market prices for like assets and liabilities. Upward and downward
shocks of interest rates are used to determine the comparative effect of such interest rate
movements relative to the unchanged environment. This measurement tool is used primarily to
evaluate the longer-term repricing risks and options in the Corporations balance sheet. A policy
limit of 10% of economic equity may be at risk for every 100 basis point shock movement in interest
rates. As of December 31, 2007, the Corporation was within economic value of equity policy limits.
50
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per-share data)
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2007 |
|
|
2006 |
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
381,283 |
|
|
$ |
355,018 |
|
Interest-bearing deposits with other banks |
|
|
11,330 |
|
|
|
27,529 |
|
Federal funds sold |
|
|
9,823 |
|
|
|
659 |
|
Loans held for sale |
|
|
103,984 |
|
|
|
239,042 |
|
Investment securities: |
|
|
|
|
|
|
|
|
Held to maturity (estimated fair value of $10,399 in 2007 and $12,534 in 2006) |
|
|
10,285 |
|
|
|
12,524 |
|
Available for sale |
|
|
3,143,267 |
|
|
|
2,865,714 |
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income |
|
|
11,204,424 |
|
|
|
10,374,323 |
|
Less: Allowance for loan losses |
|
|
(107,547 |
) |
|
|
(106,884 |
) |
|
|
|
|
|
|
|
Net Loans |
|
|
11,096,877 |
|
|
|
10,267,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
193,296 |
|
|
|
191,401 |
|
Accrued interest receivable |
|
|
73,435 |
|
|
|
71,825 |
|
Goodwill |
|
|
624,072 |
|
|
|
626,042 |
|
Intangible assets |
|
|
30,836 |
|
|
|
37,733 |
|
Other assets |
|
|
244,610 |
|
|
|
224,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
15,923,098 |
|
|
$ |
14,918,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
$ |
1,722,211 |
|
|
$ |
1,831,419 |
|
Interest-bearing |
|
|
8,383,234 |
|
|
|
8,401,050 |
|
|
|
|
|
|
|
|
Total Deposits |
|
|
10,105,445 |
|
|
|
10,232,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings: |
|
|
|
|
|
|
|
|
Federal funds purchased |
|
|
1,057,335 |
|
|
|
1,022,351 |
|
Other short-term borrowings |
|
|
1,326,609 |
|
|
|
658,489 |
|
|
|
|
|
|
|
|
Total Short-Term Borrowings |
|
|
2,383,944 |
|
|
|
1,680,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest payable |
|
|
69,238 |
|
|
|
61,392 |
|
Other liabilities |
|
|
147,418 |
|
|
|
123,805 |
|
Federal Home Loan Bank advances and long-term debt |
|
|
1,642,133 |
|
|
|
1,304,148 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
14,348,178 |
|
|
|
13,402,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
|
|
|
|
|
|
Common stock, $2.50 par value, 600 million shares authorized, 191.8 million shares issued
in 2007 and 190.8 million shares issued in 2006 |
|
|
479,559 |
|
|
|
476,987 |
|
Additional paid-in capital |
|
|
1,254,369 |
|
|
|
1,246,823 |
|
Retained earnings |
|
|
141,993 |
|
|
|
92,592 |
|
Accumulated other comprehensive loss |
|
|
(21,773 |
) |
|
|
(39,091 |
) |
Treasury stock (18.3 million shares in 2007 and 17.1 million shares in 2006), at cost |
|
|
(279,228 |
) |
|
|
(261,001 |
) |
|
|
|
|
|
|
|
Total Shareholders Equity |
|
|
1,574,920 |
|
|
|
1,516,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
15,923,098 |
|
|
$ |
14,918,964 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
51
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per-share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
Interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees |
|
$ |
801,175 |
|
|
$ |
727,297 |
|
|
$ |
517,413 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
99,621 |
|
|
|
97,652 |
|
|
|
74,921 |
|
Tax-exempt |
|
|
17,423 |
|
|
|
14,896 |
|
|
|
12,114 |
|
Dividends |
|
|
8,227 |
|
|
|
6,568 |
|
|
|
4,793 |
|
Loans held for sale |
|
|
11,501 |
|
|
|
15,564 |
|
|
|
14,940 |
|
Other interest income |
|
|
1,630 |
|
|
|
2,530 |
|
|
|
1,586 |
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income |
|
|
939,577 |
|
|
|
864,507 |
|
|
|
625,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
294,395 |
|
|
|
246,941 |
|
|
|
140,774 |
|
Short-term borrowings |
|
|
73,983 |
|
|
|
78,043 |
|
|
|
34,414 |
|
Long-term debt |
|
|
82,455 |
|
|
|
53,960 |
|
|
|
38,031 |
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense |
|
|
450,833 |
|
|
|
378,944 |
|
|
|
213,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
|
488,744 |
|
|
|
485,563 |
|
|
|
412,548 |
|
Provision for Loan Losses |
|
|
15,063 |
|
|
|
3,498 |
|
|
|
3,120 |
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income After Provision for Loan Losses |
|
|
473,681 |
|
|
|
482,065 |
|
|
|
409,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income |
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
46,500 |
|
|
|
43,773 |
|
|
|
40,198 |
|
Investment management and trust services |
|
|
38,665 |
|
|
|
37,441 |
|
|
|
35,669 |
|
Other service charges and fees |
|
|
32,151 |
|
|
|
26,792 |
|
|
|
24,229 |
|
Gains on sales of mortgage loans |
|
|
14,294 |
|
|
|
21,086 |
|
|
|
25,032 |
|
Investment securities gains, net |
|
|
1,740 |
|
|
|
7,439 |
|
|
|
6,625 |
|
Other |
|
|
14,674 |
|
|
|
13,344 |
|
|
|
12,545 |
|
|
|
|
|
|
|
|
|
|
|
Total Other Income |
|
|
148,024 |
|
|
|
149,875 |
|
|
|
144,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
217,526 |
|
|
|
213,913 |
|
|
|
181,889 |
|
Net occupancy expense |
|
|
39,965 |
|
|
|
36,493 |
|
|
|
29,275 |
|
Operating risk loss |
|
|
27,229 |
|
|
|
4,818 |
|
|
|
5,552 |
|
Equipment expense |
|
|
13,892 |
|
|
|
14,251 |
|
|
|
11,938 |
|
Data processing |
|
|
12,755 |
|
|
|
12,228 |
|
|
|
12,395 |
|
Advertising |
|
|
11,334 |
|
|
|
10,638 |
|
|
|
8,823 |
|
Intangible amortization |
|
|
8,334 |
|
|
|
7,907 |
|
|
|
5,311 |
|
Other |
|
|
74,420 |
|
|
|
65,743 |
|
|
|
61,108 |
|
|
|
|
|
|
|
|
|
|
|
Total Other Expenses |
|
|
405,455 |
|
|
|
365,991 |
|
|
|
316,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes |
|
|
216,250 |
|
|
|
265,949 |
|
|
|
237,435 |
|
Income Taxes |
|
|
63,532 |
|
|
|
80,422 |
|
|
|
71,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
152,718 |
|
|
$ |
185,527 |
|
|
$ |
166,074 |
|
|
|
|
|
|
|
|
|
|
|
|
Per-Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Basic) |
|
$ |
0.88 |
|
|
$ |
1.07 |
|
|
$ |
1.01 |
|
Net Income (Diluted) |
|
|
0.88 |
|
|
|
1.06 |
|
|
|
1.00 |
|
Cash Dividends |
|
|
0.598 |
|
|
|
0.581 |
|
|
|
0.540 |
|
See Notes to Consolidated Financial Statements
52
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other Com- |
|
|
|
|
|
|
|
|
|
Shares |
|
|
Common |
|
|
Paid-in |
|
|
Retained |
|
|
prehensive |
|
|
Treasury |
|
|
|
|
|
|
Outstanding |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Stock |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2005 |
|
|
165,008,000 |
|
|
$ |
335,604 |
|
|
$ |
1,018,403 |
|
|
$ |
60,924 |
|
|
$ |
(10,133 |
) |
|
$ |
(160,711 |
) |
|
$ |
1,244,087 |
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,074 |
|
|
|
|
|
|
|
|
|
|
|
166,074 |
|
Unrealized loss on securities
(net of $14.1 million tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,219 |
) |
|
|
|
|
|
|
(26,219 |
) |
Unrealized loss on derivative financial
instruments (net of $1.2 million tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,185 |
) |
|
|
|
|
|
|
(2,185 |
) |
Less reclassification adjustment for
gains included in net income (net of
$2.3 million tax expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,306 |
) |
|
|
|
|
|
|
(4,306 |
) |
Minimum pension liability adjustment
(net of $300,000 tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
558 |
|
|
|
|
|
|
|
558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5-for-4 stock split paid in the form of a
25 % stock dividend |
|
|
|
|
|
|
84,046 |
|
|
|
(84,114 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68 |
) |
Stock issued, including related tax benefits |
|
|
1,176,000 |
|
|
|
1,809 |
|
|
|
4,449 |
|
|
|
|
|
|
|
|
|
|
|
5,071 |
|
|
|
11,329 |
|
Stock-based compensation awards |
|
|
|
|
|
|
|
|
|
|
771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
771 |
|
Stock issued for acquisition of
SVB Financial Services, Inc.
|
|
|
3,934,000 |
|
|
|
9,368 |
|
|
|
57,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,567 |
|
Acquisition of treasury stock |
|
|
(5,250,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85,168 |
) |
|
|
(85,168 |
) |
Cash dividends $0.540 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(88,469 |
) |
|
|
|
|
|
|
|
|
|
|
(88,469 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
164,868,000 |
|
|
$ |
430,827 |
|
|
$ |
996,708 |
|
|
$ |
138,529 |
|
|
$ |
(42,285 |
) |
|
$ |
(240,808 |
) |
|
$ |
1,282,971 |
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
185,527 |
|
|
|
|
|
|
|
|
|
|
|
185,527 |
|
Unrealized gain on securities
(net of $9.8 million tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,132 |
|
|
|
|
|
|
|
18,132 |
|
Unrealized loss on derivative financial
instruments (net of $702,000 tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,304 |
) |
|
|
|
|
|
|
(1,304 |
) |
Less reclassification adjustment for
gains included in net income (net of
$2.6 million tax expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,835 |
) |
|
|
|
|
|
|
(4,835 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply Statement 158
(net of $4.7 million tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,799 |
) |
|
|
|
|
|
|
(8,799 |
) |
Stock dividend 5% |
|
|
|
|
|
|
22,648 |
|
|
|
107,952 |
|
|
|
(130,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued, including related tax benefits |
|
|
1,222,000 |
|
|
|
2,989 |
|
|
|
6,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,857 |
|
Stock-based compensation awards |
|
|
|
|
|
|
|
|
|
|
1,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,687 |
|
Stock issued for acquisition of Columbia Bancorp |
|
|
8,619,000 |
|
|
|
20,523 |
|
|
|
133,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154,131 |
|
Acquisition of treasury stock |
|
|
(1,061,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,770 |
) |
|
|
(16,770 |
) |
Accelerated share repurchase settlement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,423 |
) |
|
|
(3,423 |
) |
Cash dividends $0.581 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100,864 |
) |
|
|
|
|
|
|
|
|
|
|
(100,864 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
173,648,000 |
|
|
$ |
476,987 |
|
|
$ |
1,246,823 |
|
|
$ |
92,592 |
|
|
$ |
(39,091 |
) |
|
$ |
(261,001 |
) |
|
$ |
1,516,310 |
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,718 |
|
|
|
|
|
|
|
|
|
|
|
152,718 |
|
Unrealized gain on securities
(net of $4.6 million tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,470 |
|
|
|
|
|
|
|
8,470 |
|
Unrealized loss on derivative financial
instruments (net of $3,000 tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
(5 |
) |
Less reclassification adjustment for
gains included in net income (net of
$608,000 tax expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,131 |
) |
|
|
|
|
|
|
(1,131 |
) |
Defined benefit pension plan curtailment
(net of $4.9 million tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,122 |
|
|
|
|
|
|
|
9,122 |
|
Unrecognized pension and postretirement
costs arising in 2007 plan years (net of
$462,000 tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
858 |
|
|
|
|
|
|
|
858 |
|
Amortization of unrecognized pension and
postretirement costs (net of $2,000 tax benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued, including related tax benefits |
|
|
1,029,000 |
|
|
|
2,572 |
|
|
|
4,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,509 |
|
Stock-based compensation awards |
|
|
|
|
|
|
|
|
|
|
2,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,609 |
|
Cumulative effect of FIN 48 adoption |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
220 |
|
Acquisition of treasury stock |
|
|
(1,174,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,227 |
) |
|
|
(18,227 |
) |
Cash dividends $0.598 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103,537 |
) |
|
|
|
|
|
|
|
|
|
|
(103,537 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
173,503,000 |
|
|
$ |
479,559 |
|
|
$ |
1,254,369 |
|
|
$ |
141,993 |
|
|
$ |
(21,773 |
) |
|
$ |
(279,228 |
) |
|
$ |
1,574,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
53
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
152,718 |
|
|
$ |
185,527 |
|
|
$ |
166,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
15,063 |
|
|
|
3,498 |
|
|
|
3,120 |
|
Depreciation and amortization of premises and equipment |
|
|
19,711 |
|
|
|
19,270 |
|
|
|
16,265 |
|
Net amortization of investment security premiums |
|
|
2,111 |
|
|
|
3,608 |
|
|
|
5,158 |
|
Deferred income tax (benefit) expense |
|
|
(13,646 |
) |
|
|
(5,779 |
) |
|
|
990 |
|
Investment securities gains |
|
|
(1,740 |
) |
|
|
(7,439 |
) |
|
|
(6,625 |
) |
Gains on sales of loans |
|
|
(14,294 |
) |
|
|
(21,086 |
) |
|
|
(25,468 |
) |
Proceeds from sales of mortgage loans held for sale |
|
|
1,268,882 |
|
|
|
1,948,276 |
|
|
|
2,300,098 |
|
Originations of mortgage loans held for sale |
|
|
(1,149,807 |
) |
|
|
(1,922,854 |
) |
|
|
(2,315,410 |
) |
Amortization of intangible assets |
|
|
8,334 |
|
|
|
7,907 |
|
|
|
5,311 |
|
Impairment write-off of intangible assets |
|
|
1,069 |
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
2,639 |
|
|
|
1,687 |
|
|
|
1,041 |
|
Excess tax
benefits from stock-based compensation |
|
|
(111 |
) |
|
|
(783 |
) |
|
|
(269 |
) |
Increase in accrued interest receivable |
|
|
(1,610 |
) |
|
|
(11,908 |
) |
|
|
(10,501 |
) |
Decrease (increase) in other assets |
|
|
16,315 |
|
|
|
(12,613 |
) |
|
|
5,376 |
|
Increase in accrued interest payable |
|
|
7,846 |
|
|
|
21,741 |
|
|
|
11,008 |
|
Decrease in other liabilities |
|
|
(8,789 |
) |
|
|
(7,384 |
) |
|
|
(7,750 |
) |
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
151,973 |
|
|
|
16,141 |
|
|
|
(17,656 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
304,691 |
|
|
|
201,668 |
|
|
|
148,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of securities available for sale |
|
|
365,559 |
|
|
|
147,194 |
|
|
|
143,806 |
|
Proceeds from maturities of securities held to maturity |
|
|
3,191 |
|
|
|
5,923 |
|
|
|
10,846 |
|
Proceeds from maturities of securities available for sale |
|
|
490,252 |
|
|
|
598,111 |
|
|
|
666,060 |
|
Purchase of securities held to maturity |
|
|
(2,287 |
) |
|
|
(698 |
) |
|
|
(4,403 |
) |
Purchase of securities available for sale |
|
|
(1,111,203 |
) |
|
|
(868,876 |
) |
|
|
(861,897 |
) |
Decrease in short-term investments |
|
|
7,035 |
|
|
|
20,598 |
|
|
|
78,265 |
|
Net increase in loans |
|
|
(809,562 |
) |
|
|
(886,372 |
) |
|
|
(589,053 |
) |
Net cash paid for acquisitions |
|
|
|
|
|
|
(109,729 |
) |
|
|
(3,791 |
) |
Net purchase of premises and equipment |
|
|
(21,606 |
) |
|
|
(32,642 |
) |
|
|
(30,263 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,078,621 |
) |
|
|
(1,126,491 |
) |
|
|
(590,430 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in demand and savings deposits |
|
|
(233,523 |
) |
|
|
(137,546 |
) |
|
|
35,153 |
|
Net increase in time deposits |
|
|
106,499 |
|
|
|
596,240 |
|
|
|
400,672 |
|
Additions to long-term debt |
|
|
1,463,633 |
|
|
|
550,166 |
|
|
|
319,606 |
|
Repayments of long-term debt |
|
|
(1,125,648 |
) |
|
|
(186,499 |
) |
|
|
(168,207 |
) |
Increase in short-term borrowings |
|
|
703,104 |
|
|
|
197,795 |
|
|
|
104,438 |
|
Dividends paid |
|
|
(103,122 |
) |
|
|
(98,022 |
) |
|
|
(85,495 |
) |
Net proceeds from issuance of common stock |
|
|
7,368 |
|
|
|
9,074 |
|
|
|
10,722 |
|
Excess tax
benefits from stock-based compensation |
|
|
111 |
|
|
|
783 |
|
|
|
269 |
|
Acquisition of treasury stock |
|
|
(18,227 |
) |
|
|
(20,193 |
) |
|
|
(85,168 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
800,195 |
|
|
|
911,798 |
|
|
|
531,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Due From Banks |
|
|
26,265 |
|
|
|
(13,025 |
) |
|
|
89,978 |
|
Cash and Due From Banks at Beginning of Year |
|
|
355,018 |
|
|
|
368,043 |
|
|
|
278,065 |
|
|
|
|
|
|
|
|
|
|
|
Cash and Due From Banks at End of Year |
|
$ |
381,283 |
|
|
$ |
355,018 |
|
|
$ |
368,043 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
442,987 |
|
|
$ |
357,203 |
|
|
$ |
202,211 |
|
Income taxes |
|
|
65,053 |
|
|
|
77,327 |
|
|
|
60,539 |
|
See Notes to Consolidated Financial Statements
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: Fulton Financial Corporation (Parent Company) is a multi-bank financial holding company
which provides a full range of banking and financial services to businesses and consumers through
its eleven wholly owned banking subsidiaries: Fulton Bank, Swineford National Bank, Lafayette
Ambassador Bank, FNB Bank N.A., Hagerstown Trust Company, Delaware National Bank, The Bank, The
Peoples Bank of Elkton, Skylands Community Bank, Resource Bank and The Columbia Bank as well as its
financial services subsidiaries, Fulton Financial Advisors, N.A., and Fulton Insurance Services
Group, Inc. In addition, the Parent Company owns the following non-bank subsidiaries: Fulton
Financial Realty Company, Fulton Reinsurance Company, LTD, Central Pennsylvania Financial Corp.,
FFC Management, Inc, Virginia Financial Services, LLC and FFC Penn Square, Inc. Collectively, the
Parent Company and its subsidiaries are referred to as the Corporation.
During 2007 and 2006, the Corporation completed the consolidation of certain wholly owned banking
subsidiaries. In December 2006, the former Premier Bank subsidiary consolidated with Fulton Bank.
In February 2007, the former First Washington State Bank subsidiary consolidated with The Bank. In
May 2007, the former Somerset Valley Bank subsidiary consolidated with Skylands Community Bank. In
July 2007, the former Lebanon Valley Farmers Bank subsidiary consolidated with Fulton Bank. In
addition, during 2007, the Corporation announced the consolidation of Resource Bank with Fulton
Bank, which is expected to occur in the first quarter of 2008.
The Corporations primary sources of revenue are interest income on loans and investment securities
and fee income on its products and services. Its expenses consist of interest expense on deposits
and borrowed funds, provision for loan losses, other operating expenses and income taxes. The
Corporations primary competition is other financial services providers operating in its region.
Competitors also include financial services providers located outside the Corporations
geographical market as a result of the growth in electronic delivery systems. The Corporation is
subject to the regulations of certain Federal and state agencies and undergoes periodic
examinations by such regulatory authorities.
The Corporation offers, through its banking subsidiaries, a full range of retail and commercial
banking services throughout central and eastern Pennsylvania, Delaware, Maryland, New Jersey and
Virginia. Industry diversity is the key to the economic well being of these markets, and the
Corporation is not dependent upon any single customer or industry.
Basis of Financial Statement Presentation: The consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States (U.S. GAAP) and
include the accounts of the Parent Company and all wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The preparation of financial
statements in accordance with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported amounts of revenues and
expenses during the period. Actual results could differ from those estimates.
Investments: Debt securities are classified as held to maturity at the time of purchase when the
Corporation has both the intent and ability to hold these investments until they mature. Such debt
securities are carried at cost, adjusted for amortization of premiums and accretion of discounts
using the effective yield method. The Corporation does not engage in trading activities, however,
since the investment portfolio serves as a source of liquidity, most debt securities and all
marketable equity securities are classified as available for sale. Securities available for sale
are carried at estimated fair value with the related unrealized holding gains and losses reported
in shareholders equity as a component of other comprehensive income, net of tax. Realized
securities gains and losses are computed using the specific identification method and are recorded
on a trade date basis. Securities are evaluated periodically to determine whether declines in value
are other than temporary. Declines in value that are determined to be other than temporary are
recorded as realized losses on the consolidated statements of income.
Loans and Revenue Recognition: Loan and lease financing receivables are stated at their principal
amount outstanding, except for loans held for sale, which are carried at the lower of aggregate
cost or market value. Loans transferred from held for sale to portfolio are reclassified at the
lower of cost or market, with write-downs recorded as other expense. Interest income on loans is
accrued as earned. Unearned income on lease financing receivables is recognized on a basis which
approximates the effective yield method. Premiums and discounts on purchased loans are amortized as
an adjustment to interest income using the effective yield method.
Accrual of interest income is generally discontinued when a loan becomes 90 days past due as to
principal or interest, except for adequately collateralized mortgage loans. When interest accruals
are discontinued, unpaid interest credited to income is reversed.
55
Non-accrual loans are restored to accrual status when all delinquent principal and interest become current or the loan is considered
secured and in the process of collection.
Loan Origination Fees and Costs: Loan origination fees and the related direct origination costs
are offset and the net amount is deferred and amortized over the life of the loan using the
effective interest method as an adjustment to interest income. For mortgage loans sold, the net
amount is included in gain or loss upon the sale of the related mortgage loan.
Allowance for Credit Losses: The allowance for credit losses consists of the allowance for loan
losses and the reserve for unfunded lending commitments. The allowance for loan losses represents
managements estimate of losses inherent in the existing loan portfolio and is recorded as a
reduction to loans. The reserve for unfunded lending commitments represents managements estimate
of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the
consolidated balance sheet. The allowance for credit losses is increased by charges to expense,
through the provision for loan losses, and decreased by charge-offs, net of recoveries.
Managements periodic evaluation of the adequacy of the allowance for credit losses is based on the
Corporations past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrowers ability to repay, the estimated fair value of underlying
collateral and current economic conditions, among other considerations. Management believes that
the allowance for loan losses and the reserve for unfunded lending commitments are adequate,
however, future changes to the allowance or reserve may be necessary based on changes in any of
these factors.
The allowance for loan losses consists of two components specific allowances allocated to
individually impaired loans, as defined by the Financial Accounting Standards Boards (FASB)
Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a
Loan (Statement 114), and allowances calculated for pools of loans under Statement of Financial
Accounting Standards No. 5, Accounting for Contingencies (Statement 5).
Commercial loans and commercial mortgages are reviewed for impairment under Statement 114 if they
are both greater than $100,000 and rated less than satisfactory based upon the Corporations
internal credit-rating process. A satisfactory loan does not present more than a normal credit risk
based on the strength of the borrowers management, financial condition and trends, and the type
and sufficiency of underlying collateral, it is expected that the borrower will be able to satisfy
the terms of the loan agreement.
A loan is considered to be impaired when, based on current information and events, it is probable
that the Corporation will be unable to collect all amounts due according to the contractual terms
of the loan agreement. Impaired loans are measured based on the present value of expected future
cash flows discounted at the loans effective interest rate, or at the loans observable market
price or fair value of the collateral if the loan is collateral dependent. An allowance is
allocated to an impaired loan if the carrying value exceeds the estimated fair value.
All loans not reviewed for impairment are evaluated under Statement 5. In addition to commercial
loans and mortgages not meeting the impairment evaluation criteria discussed above, these loans
include residential mortgages, consumer loans, installment loans and lease receivables. These loans
are segmented into groups with similar characteristics and an allowance for loan losses is
allocated to each segment based on quantitative factors, such as recent loss history, and
qualitative factors, such as economic conditions and trends.
Loans and lease financing receivables deemed to be a loss are written off through a charge against
the allowance for credit losses. Consumer loans are generally charged off when they become 120 days
past due if they are not adequately secured by real estate. All other loans are evaluated for
possible charge-off when it is probable that the balance will not be collected, based on the
ability of the borrower to pay and the value of the underlying collateral. Recoveries of loans
previously charged off are recorded as increases to the allowance for credit losses. Past due
status is determined based on contractual due dates for loan payments.
Lease financing receivables include both open and closed end leases for the purchase of vehicles
and equipment. Residual values are set at the inception of the lease and are reviewed periodically
for impairment. If the impairment is considered to be other than temporary, the resulting reduction
in the net investment in the lease is recognized as a loss in the period when impairment occurs.
Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation
and amortization. The provision for depreciation and amortization is generally computed using the
straight-line method over the estimated useful lives of the related assets, which are a maximum of
50 years for buildings and improvements, 8 years for furniture and 5 years for equipment.
Leasehold improvements are amortized over the shorter of 15 years or the non-cancelable lease term.
Interest costs incurred during the construction of major bank premises are capitalized.
56
Other Real Estate Owned: Assets acquired in settlement of mortgage loan indebtedness are recorded
as other real estate owned and are included in other assets on the consolidated balance sheet
initially at the lower of the estimated fair value of the asset less estimated selling costs or the
carrying amount of the loan. Costs to maintain the assets and subsequent gains and losses on sales
are included in other expense or other income, as appropriate.
Mortgage Servicing Rights: The estimated fair value of mortgage servicing rights (MSRs) related
to loans sold and serviced by the Corporation is recorded as an asset upon the sale of such loans.
MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying
loans. In addition, MSRs are evaluated quarterly for impairment and, if necessary, additional
write-offs are recorded.
Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets
- an amendment of FASB Statement No. 140 (Statement 156), requires recognition of a servicing
asset or liability at fair value each time an obligation is undertaken to service a financial asset
by entering into a servicing contract. Statement 156 also provides guidance on subsequent
measurement methods for each class of separately recognized servicing assets and liabilities and
specifies financial statement presentation and disclosure requirements. This statement was
effective for fiscal years beginning after September 15, 2006, or January 1, 2007 for the
Corporation. The Corporation elected to continue amortizing MSRs over the estimated lives of the
underlying loans. As a result, the adoption of this standard did not impact the Corporations
consolidated financial statements.
Derivative Financial Instruments: As of December 31, 2007, interest rate swaps with a notional
amount of $248.0 million were used to hedge certain long-term fixed rate certificates of deposit.
The terms of the certificates of deposit and the interest rate swaps are similar and were committed
to simultaneously. Under the terms of the swap agreements, the Corporation is the fixed rate
receiver and the floating rate payer (generally tied to the three month London Interbank Offering
Rate, or LIBOR, a common index used for setting rates between financial institutions). The interest
rate swaps are classified as fair value hedges and both the interest rate swaps and the
certificates of deposit are recorded at fair value, with changes in the fair values during the
period recorded to other expense. The fair values of the interest rate swaps are recorded as a
component of other liabilities on the consolidated balance sheets. For interest rate swaps
accounted for as fair value hedges, ineffectiveness is the difference between the changes in the
fair value of the interest rate swaps and the hedged items, in this case the certificates of
deposit. The Corporations analysis of effectiveness indicated the hedges were highly effective as
of December 31, 2007. For the year ended December 31, 2007, a net loss of $287,000 was recorded in
other expense, representing the net impact of the changes in fair values of the interest rate swaps
and the certificates of deposit, compared to a net gain of $217,000 recorded for the year ended
December 31, 2006.
The Corporation entered into a forward-starting interest rate swap with a notional amount of $150.0
million in October 2005 in anticipation of the issuance of trust preferred securities in January
2006. This swap was accounted for as a cash flow hedge as it hedged the variability of interest
payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt.
The total loss recorded as a reduction to accumulated other comprehensive income upon settlement of
this derivative is being amortized to interest expense over the life of the related securities
using the effective interest method. The amount of net losses in accumulated other comprehensive
income that will be reclassified into earnings in 2008 is expected to be approximately $120,000.
In February 2007, the Corporation entered into a forward-starting interest swap with a notional
amount of $100.0 million in anticipation of the issuance of subordinated debt in May 2007. This
swap was accounted for as a cash flow hedge as it hedged the variability of interest payments
attributable to changes in interest rates on the forecasted issuance of fixed-rate debt. The
Corporation settled this derivative on its contractual maturity date in April 2007 with a total
payment of $232,000 to the counterparty, including a $151,000 charge to other comprehensive income
(net of an $81,000 tax effect). The total loss recorded as a reduction to accumulated other
comprehensive income is being amortized to interest expense over the life of the related securities
using the effective interest method. The amount of net losses in accumulated other comprehensive
income that will be reclassified into earnings in 2008 is expected to be approximately $15,000.
Income Taxes: The provision for income taxes is based upon income before income taxes, adjusted
primarily for the effect of tax-exempt income and net credits received from investments in low and
moderate income housing partnerships (LIH investments). Certain items of income and expense are
reported in different periods for financial reporting and tax return purposes. The tax effects of
these temporary differences are recognized currently in the deferred income tax provision or
benefit. Deferred tax assets or liabilities are computed based on the difference between the
financial statement and income tax bases of assets and liabilities using the applicable enacted
marginal tax rate. The deferred income tax provision or benefit is based on the changes in the
deferred tax asset or liability from period to period.
57
Stock-Based Compensation: The Corporation accounts for its stock-based compensation awards in
accordance with Statement of Financial Accounting Standards No. 123R, Share-Based Payment
(Statement 123R), which requires public companies to recognize compensation expense related to
stock-based compensation awards in their income statements. Compensation expense is equal to the
fair value of the stock-based compensation awards, net of estimated forfeitures, and is recognized
over the vesting period of such awards.
Net Income Per Share: The Corporations basic net income per share is calculated as net income
divided by the weighted average number of shares outstanding. For diluted net income per share, net
income is divided by the weighted average number of shares outstanding plus the incremental number
of shares added as a result of converting common stock equivalents, calculated using the treasury
stock method. The Corporations common stock equivalents consist of outstanding stock options and
restricted stock.
A reconciliation of the weighted average shares outstanding used to calculate basic net income per
share and diluted net income per share follows. There were no adjustments to net income to arrive
at diluted net income per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
Weighted average shares outstanding (basic) |
|
|
173,295 |
|
|
|
172,830 |
|
|
|
164,234 |
|
Impact of common stock equivalents |
|
|
1,091 |
|
|
|
2,042 |
|
|
|
2,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (diluted) |
|
|
174,386 |
|
|
|
174,872 |
|
|
|
166,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options excluded from the diluted shares
computation as their effect would have been anti-dilutive |
|
|
4,426 |
|
|
|
2,179 |
|
|
|
1,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disclosures about Segments of an Enterprise and Related Information: The Corporation does not have
any operating segments which require disclosure of additional information. While the Corporation
owns eleven separate banks, each engages in similar activities, provides similar products and
services, and operates in the same general geographical area. The Corporations non-banking
activities are immaterial and, therefore, separate information has not been disclosed.
Financial Guarantees: Financial guarantees, which consist primarily of standby and commercial
letters of credit, are accounted for by recognizing a liability equal to the fair value of the
guarantees and crediting the liability to income over the term of the guarantee. Fair value is
estimated using the fees currently charged to enter into similar agreements with similar terms.
Business Combinations and Intangible Assets: The Corporation accounts for its acquisitions using
the purchase accounting method as required by Statement of Financial Accounting Standards No. 141,
Business Combinations. Purchase accounting requires the total purchase price to be allocated to
the estimated fair values of assets and liabilities acquired, including certain intangible assets
that must be recognized. Typically, this allocation results in the purchase price exceeding the
fair value of net assets acquired, which is recorded as goodwill.
As required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets (Statement 142), goodwill is not amortized to expense, but is tested for impairment at
least annually. Write-downs of the balance, if necessary as a result of the impairment test, are to
be charged to expense in the period in which goodwill is determined to be impaired. The Corporation
performs its annual test of goodwill impairment as of October 31st of each year. Based on the
results of these tests, the Corporation concluded that there was no impairment, and no write-downs
were recorded in 2007, 2006 or 2005. If certain events occur which might indicate goodwill has been
impaired between annual tests, the goodwill must be tested when such events occur.
Variable Interest Entities: FASB Interpretation No. 46R, Consolidation of Variable Interest
Entities (revised December 2003) An Interpretation of ARB No. 51 (FIN 46R), provides guidance on
when to consolidate certain Variable Interest Entities (VIEs) in the financial statements of the
Corporation. VIEs are entities in which equity investors do not have a controlling financial
interest or do not have sufficient equity at risk for the entity to finance activities without
additional financial support from other parties. Under FIN 46R, a company must consolidate a VIE if
the company has a variable interest that will absorb a majority of the VIEs losses, if they occur,
and/or receive a majority of the VIEs residual returns, if they occur. For the Corporation, FIN
46R affects securities issued by subsidiary trusts (Subsidiary Trusts) and its LIH investments.
58
The provisions of FIN 46R related to Subsidiary Trusts, as interpreted by the Securities and
Exchange Commission (SEC), disallow consolidation of Subsidiary Trusts in the financial statements
of the Corporation. As a result, securities that were issued by the trusts (Trust Preferred
Securities) are not included in the Corporations consolidated balance sheets. The junior
subordinated debentures issued by the Parent Company to the Subsidiary Trusts, which have the same
total balance and rate as the combined equity securities and trust preferred securities issued by
the Subsidiary Trusts, remain in long-term debt (See Note I, Short-Term Borrowings and Long-Term
Debt).
LIH Investments are amortized under the effective interest method over the life of the Federal
income tax credits generated as a result of such investments, generally ten years. At December 31,
2007 and 2006, the Corporations LIH Investments, included in other assets on the consolidated
balance sheets, totaled $37.2 million and $41.3 million, respectively. The net income tax benefit
associated with these investments was $3.7 million, $3.9 million and $4.9 million in 2007, 2006 and
2005, respectively. None of the Corporations LIH Investments met the consolidation criteria of FIN
46 or its related interpretations as of December 31, 2007 or 2006.
New Accounting Standards: In September 2006, the FASB ratified Emerging Issues Task Force (EITF)
Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements (EITF 06-4). EITF 06-4 addresses accounting for
endorsement split-dollar life insurance arrangements that provide a benefit to an employee that
extends to postretirement periods. EITF 06-4 would require that the postretirement benefit aspects
of an endorsement-type split-dollar life insurance arrangement be recognized as a liability by the
employer if that obligation has not been settled through the related insurance arrangement. EITF
06-4 is effective for fiscal years beginning after December 15, 2007, or January 1, 2008 for the
Corporation. The adoption of EITF 06-4 is not expected to have a material impact on the
consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurement (Statement 157). Statement 157 defines fair value, establishes a framework for
measuring fair value in U.S. GAAP, and expands disclosure requirements for fair value measurements.
Statement 157 does not require any new fair value measurements and is effective for financial
statements issued for fiscal years beginning after November 15, 2007, or January 1, 2008 for the
Corporation. The adoption of Statement 157 is not expected to have a material impact on the
consolidated financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial Assets
and Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115 (Statement 159).
Statement 159 permits entities to choose to measure many financial instruments and certain other
items at fair value and amends Statement 115 to, among other things, require certain disclosures
for amounts for which the fair value option is applied. Additionally, this standard provides that
an entity may reclassify held-to-maturity and available-for-sale securities to the trading account
when the fair value option is elected for such securities, without calling into question the intent
to hold other securities to maturity in the future. This standard is effective as of the beginning
of an entitys first fiscal year that begins after November 15, 2007, or January 1, 2008 for the
Corporation. The adoption of Statement 159 is not expected to have a material impact on the
consolidated financial statements.
In March 2007, the FASB ratified EITF Issue 06-10, Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements
(EITF 06-10). EITF 06-10 addresses accounting for collateral assignment split-dollar life insurance
arrangements that provide a benefit to an employee that extends to postretirement periods. EITF
06-10 provides guidance for determining the liability for the postretirement benefit aspects of
collateral assignment-type split-dollar life insurance arrangements, as well as the recognition and
measurement of the associated asset on the basis of the terms of the collateral assignment
agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007, or January
1, 2008 for the Corporation. The adoption of EITF 06-10 is not expected to have a material impact
on the consolidated financial statements.
In June 2007, the FASB ratified EITF Issue 06-11, Accounting for Income Tax Benefits of Dividends
on Share-Based Payment Awards (EITF 06-11). EITF 06-11 requires that tax benefits associated with
dividends on share-based payment awards be recorded as a component of additional paid-in capital.
EITF 06-11 is effective, on a prospective basis, for fiscal years beginning after December 15,
2007, or January 1, 2008 for the Corporation. The adoption of EITF 06-11 is not expected to have a
material impact on the consolidated financial statements.
In November 2007, the SEC issued Staff Accounting Bulletin No. 109 (Topic 5DD), Written Loan
Commitments Recorded at Fair Value Through Earnings (SAB 109). SAB 109 provides an interpretation
of the SECs views regarding derivative loan commitments that are accounted for at fair value
through earnings under U.S. GAAP. Specifically, the interpretation requires registrants that record
fair value measurements of derivative loan commitments through earnings to also include the future
cash flows related to the loans servicing rights. SAB 109 is effective for all derivative loan
commitments issued or modified in fiscal quarters beginning after
59
December 15, 2007, or January 1,
2008 for the Corporation. The adoption of SAB 109 is not expected to have a material impact on the
consolidated financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised
2007), Business Combinations (Statement 141R). The statement establishes principles and
requirements for how an acquirer: recognizes and measures in its financial statement the
identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from
a bargain purchase; and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. Statement 141R
is effective for all business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008, or January
1, 2009 for the Corporation. This standard does not impact acquisitions consummated prior to
December 31, 2008.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements (Statement 160), which establishes
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The statement is effective for periods beginning on or after
December 15, 2008, or January 1, 2009 for the Corporation. The Corporation is currently evaluating
the impact of Statement 160 on the consolidated financial statements.
Reclassifications: Certain amounts in the 2006 and 2005 consolidated financial statements and notes
have been reclassified to conform to the 2007 presentation.
NOTE
B RESTRICTIONS ON CASH AND DUE FROM BANKS
The Corporations subsidiary banks are required to maintain reserves, in the form of cash and
balances with the Federal Reserve Bank, against their deposit liabilities. The amount of such
reserves as of December 31, 2007 and 2006 was $80.3 million and $31.3 million, respectively.
60
NOTE
C INVESTMENT SECURITIES
The following tables present the amortized cost and estimated fair values of investment securities
as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
(in thousands) |
|
2007 Held to Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored
agency securities |
|
$ |
6,478 |
|
|
$ |
33 |
|
|
$ |
|
|
|
$ |
6,511 |
|
State and municipal securities |
|
|
1,120 |
|
|
|
7 |
|
|
|
|
|
|
|
1,127 |
|
Corporate debt securities |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
25 |
|
Mortgage-backed securities |
|
|
2,662 |
|
|
|
74 |
|
|
|
|
|
|
|
2,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,285 |
|
|
$ |
114 |
|
|
$ |
|
|
|
$ |
10,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Available for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
215,177 |
|
|
$ |
282 |
|
|
$ |
(23,734 |
) |
|
$ |
191,725 |
|
U.S. Government securities |
|
|
14,489 |
|
|
|
47 |
|
|
|
|
|
|
|
14,536 |
|
U.S. Government sponsored
agency securities |
|
|
200,899 |
|
|
|
1,658 |
|
|
|
(34 |
) |
|
|
202,523 |
|
State and municipal securities |
|
|
520,670 |
|
|
|
2,488 |
|
|
|
(1,620 |
) |
|
|
521,538 |
|
Corporate debt securities |
|
|
172,907 |
|
|
|
1,259 |
|
|
|
(8,184 |
) |
|
|
165,982 |
|
Collateralized mortgage obligations |
|
|
588,848 |
|
|
|
6,604 |
|
|
|
(677 |
) |
|
|
594,775 |
|
Mortgage-backed securities |
|
|
1,460,219 |
|
|
|
6,167 |
|
|
|
(14,198 |
) |
|
|
1,452,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,173,209 |
|
|
$ |
18,505 |
|
|
$ |
(48,447 |
) |
|
$ |
3,143,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Held to Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored
agency securities |
|
$ |
7,648 |
|
|
$ |
|
|
|
$ |
(68 |
) |
|
$ |
7,580 |
|
State and municipal securities |
|
|
1,262 |
|
|
|
11 |
|
|
|
|
|
|
|
1,273 |
|
Corporate debt securities |
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
75 |
|
Mortgage-backed securities |
|
|
3,539 |
|
|
|
68 |
|
|
|
(1 |
) |
|
|
3,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,524 |
|
|
$ |
79 |
|
|
$ |
(69 |
) |
|
$ |
12,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Available for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
165,931 |
|
|
$ |
2,960 |
|
|
$ |
(3,255 |
) |
|
$ |
165,636 |
|
U.S. Government securities |
|
|
17,062 |
|
|
|
5 |
|
|
|
(1 |
) |
|
|
17,066 |
|
U.S. Government sponsored
agency securities |
|
|
289,816 |
|
|
|
129 |
|
|
|
(1,480 |
) |
|
|
288,465 |
|
State and municipal securities |
|
|
493,525 |
|
|
|
1,599 |
|
|
|
(6,845 |
) |
|
|
488,279 |
|
Corporate debt securities |
|
|
69,575 |
|
|
|
1,449 |
|
|
|
(387 |
) |
|
|
70,637 |
|
Collateralized
mortgage obligations |
|
|
494,484 |
|
|
|
1,609 |
|
|
|
(3,569 |
) |
|
|
492,524 |
|
Mortgage-backed securities |
|
|
1,376,651 |
|
|
|
2,265 |
|
|
|
(35,809 |
) |
|
|
1,343,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,907,044 |
|
|
$ |
10,016 |
|
|
$ |
(51,346 |
) |
|
$ |
2,865,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
The amortized cost and estimated fair value of debt securities at December 31, 2007, by contractual
maturity, are shown in the following table. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity |
|
|
Available for Sale |
|
|
|
Amortized |
|
|
Estimated |
|
|
Amortized |
|
|
Estimated |
|
|
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
|
|
(in thousands) |
|
Due in one year or less |
|
$ |
167 |
|
|
$ |
167 |
|
|
$ |
82,547 |
|
|
$ |
82,593 |
|
Due from one year to five years |
|
|
7,456 |
|
|
|
7,496 |
|
|
|
476,805 |
|
|
|
477,202 |
|
Due from five years to ten years |
|
|
|
|
|
|
|
|
|
|
67,784 |
|
|
|
66,987 |
|
Due after ten years |
|
|
|
|
|
|
|
|
|
|
281,829 |
|
|
|
277,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,623 |
|
|
|
7,663 |
|
|
|
908,965 |
|
|
|
904,579 |
|
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
588,848 |
|
|
|
594,775 |
|
Mortgage-backed securities |
|
|
2,662 |
|
|
|
2,736 |
|
|
|
1,460,219 |
|
|
|
1,452,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,285 |
|
|
$ |
10,399 |
|
|
$ |
2,958,032 |
|
|
$ |
2,951,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents information related to the Corporations realized gains and losses on
the sales of equity and debt securities, including losses recognized for other than temporary
impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Realized
Gains |
|
|
Gross
Realized
Losses |
|
|
Net Realized
Gains |
|
|
|
(in thousands) |
|
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
1,987 |
|
|
$ |
343 |
|
|
$ |
1,644 |
|
Debt securities |
|
|
2,158 |
|
|
|
2,062 |
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,145 |
|
|
$ |
2,405 |
|
|
$ |
1,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
7,128 |
|
|
$ |
163 |
|
|
$ |
6,965 |
|
Debt securities |
|
|
555 |
|
|
|
81 |
|
|
|
474 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,683 |
|
|
$ |
244 |
|
|
$ |
7,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
5,850 |
|
|
$ |
68 |
|
|
$ |
5,782 |
|
Debt securities |
|
|
1,654 |
|
|
|
811 |
|
|
|
843 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,504 |
|
|
$ |
879 |
|
|
$ |
6,625 |
|
|
|
|
|
|
|
|
|
|
|
Securities carried at $1.5 billion and $1.4 billion at December 31, 2007 and 2006, respectively,
were pledged as collateral to secure public and trust deposits, customer repurchase agreements and
interest rate swaps. Available for sale equity securities include restricted investment securities
issued by the Federal Home Loan Bank and the Federal Reserve Bank totaling $109.3 million and $71.8
million at December 31, 2007 and 2006, respectively.
62
The following table presents the gross unrealized losses and estimated fair values of investments,
aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position, at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 months |
|
|
12 Months or Longer |
|
|
Total |
|
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
(in thousands) |
|
U.S.
Government sponsored agency securities |
|
$ |
2,907 |
|
|
$ |
(6 |
) |
|
$ |
5,294 |
|
|
$ |
(28 |
) |
|
$ |
8,201 |
|
|
$ |
(34 |
) |
State and municipal securities |
|
|
37,528 |
|
|
|
(180 |
) |
|
|
219,573 |
|
|
|
(1,440 |
) |
|
|
257,101 |
|
|
|
(1,620 |
) |
Corporate debt securities |
|
|
103,591 |
|
|
|
(7,501 |
) |
|
|
7,640 |
|
|
|
(683 |
) |
|
|
111,231 |
|
|
|
(8,184 |
) |
Collateralized mortgage obligations |
|
|
28,495 |
|
|
|
(198 |
) |
|
|
74,262 |
|
|
|
(479 |
) |
|
|
102,757 |
|
|
|
(677 |
) |
Mortgage-backed securities |
|
|
71,575 |
|
|
|
(184 |
) |
|
|
843,126 |
|
|
|
(14,014 |
) |
|
|
914,701 |
|
|
|
(14,198 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
244,096 |
|
|
|
(8,069 |
) |
|
|
1,149,895 |
|
|
|
(16,644 |
) |
|
|
1,393,991 |
|
|
|
(24,713 |
) |
Equity securities |
|
|
51,766 |
|
|
|
(16,541 |
) |
|
|
18,745 |
|
|
|
(7,193 |
) |
|
|
70,511 |
|
|
|
(23,734 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
295,862 |
|
|
$ |
(24,610 |
) |
|
$ |
1,168,640 |
|
|
$ |
(23,837 |
) |
|
$ |
1,464,502 |
|
|
$ |
(48,447 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The equity securities within the preceding table consist primarily of common stocks of other
financial institutions, which have experienced recent declines in value consistent with the
industry as a whole. Management evaluated the near-term prospects of the issuers in relation to the
severity and duration of the impairment. Based on that evaluation and the Corporations ability and
intent to hold those investments for a reasonable period of time sufficient for a recovery of fair
value, the Corporation does not consider those investments to be other than temporarily impaired at
December 31, 2007.
The unrealized losses on the Corporations investments in debt securities were caused by interest
rate increases. The contractual terms of those investments generally do not permit the issuer to
settle the securities at a price less than the amortized cost of the investment. In addition, the
contractual cash flows of the Corporations mortgage-backed securities are guaranteed by an agency
sponsored by the U.S. government. Because the decline in market values is attributable to changes
in interest rates and not credit quality, and because the Corporation has the ability and intent to
hold those investments until a recovery of fair value, which may be maturity, the Corporation does
not consider those investments to be other than temporarily impaired at December 31, 2007.
The Corporation evaluates whether unrealized losses on debt and equity investments indicate other
than temporary impairment. Based upon this evaluation, losses of $292,000, $122,000 and $65,000
were recognized in 2007, 2006 and 2005, respectively. For 2007, the other than temporary impairment
losses includes losses of $32,000 for the write-down of debt securities. There were no other than
temporary impairment write-downs recorded for debt securities in 2006 or 2005.
NOTE D LOANS AND ALLOWANCE FOR CREDIT LOSSES
Gross loans are summarized as follows as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Commercial industrial, financial and agricultural |
|
$ |
3,427,085 |
|
|
$ |
2,965,186 |
|
Real-estate commercial mortgage |
|
|
3,502,282 |
|
|
|
3,213,809 |
|
Real-estate residential mortgage |
|
|
851,577 |
|
|
|
696,836 |
|
Real-estate home equity |
|
|
1,501,231 |
|
|
|
1,455,439 |
|
Real-estate construction |
|
|
1,342,923 |
|
|
|
1,428,809 |
|
Consumer |
|
|
500,708 |
|
|
|
523,066 |
|
Leasing and other |
|
|
79,175 |
|
|
|
76,366 |
|
Overdrafts |
|
|
10,208 |
|
|
|
24,345 |
|
|
|
|
|
|
|
|
|
|
|
11,215,189 |
|
|
|
10,383,856 |
|
Unearned income |
|
|
(10,765 |
) |
|
|
(9,533 |
) |
|
|
|
|
|
|
|
|
|
$ |
11,204,424 |
|
|
$ |
10,374,323 |
|
|
|
|
|
|
|
|
63
Changes in the allowance for credit losses were as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Balance at beginning of year |
|
$ |
106,884 |
|
|
$ |
92,847 |
|
|
$ |
89,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off |
|
|
(13,739 |
) |
|
|
(6,969 |
) |
|
|
(8,204 |
) |
Recoveries of loans previously charged off |
|
|
4,001 |
|
|
|
4,517 |
|
|
|
5,196 |
|
|
|
|
|
|
|
|
|
|
|
Net loans charged off |
|
|
(9,738 |
) |
|
|
(2,452 |
) |
|
|
(3,008 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
15,063 |
|
|
|
3,498 |
|
|
|
3,120 |
|
Allowance purchased |
|
|
|
|
|
|
12,991 |
|
|
|
3,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
112,209 |
|
|
$ |
106,884 |
|
|
$ |
92,847 |
|
|
|
|
|
|
|
|
|
|
|
The following table presents the components of the allowance for credit losses for the years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Allowance for loan losses |
|
$ |
107,547 |
|
|
$ |
106,884 |
|
|
$ |
92,847 |
|
Reserve for unfunded lending commitments (1) |
|
|
4,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
$ |
112,209 |
|
|
$ |
106,884 |
|
|
$ |
92,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reserve for unfunded commitments transferred to other liabilities as of December 31,
2007. Prior periods were not reclassified. |
The following table presents non-performing assets as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Non-accrual loans |
|
$ |
76,150 |
|
|
$ |
33,113 |
|
Accruing loans greater than 90 days past due |
|
|
29,782 |
|
|
|
20,632 |
|
Other real estate owned |
|
|
14,934 |
|
|
|
4,103 |
|
|
|
|
|
|
|
|
|
|
$ |
120,866 |
|
|
$ |
57,848 |
|
|
|
|
|
|
|
|
The recorded investment in loans that were considered to be impaired, as defined by Statement 114,
and the related allowance for loan loss at December 31 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Related |
|
|
|
|
|
|
Related |
|
|
|
Recorded |
|
|
Allowance for |
|
|
Recorded |
|
|
Allowance for |
|
|
|
Investment |
|
|
Loan Loss (1) |
|
|
Investment |
|
|
Loan Loss (1) |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Performing loans |
|
$ |
240,255 |
|
|
$ |
(60,102 |
) |
|
$ |
212,451 |
|
|
$ |
(60,942 |
) |
Non-accrual loans |
|
|
24,500 |
|
|
|
(9,600 |
) |
|
|
18,500 |
|
|
|
(5,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired
loans (as
defined by
Statement 114) |
|
$ |
264,755 |
|
|
$ |
(69,702 |
) |
|
$ |
230,951 |
|
|
$ |
(66,042 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At December 31, 2007 and 2006, there were no impaired loans that did not have a related
allowance for loan loss. |
64
The average recorded investment in impaired performing loans during 2007, 2006 and 2005 was
approximately $216.8 million, $200.7 million and $119.0 million, respectively. The average recorded
investment in impaired non-accrual loans during 2007, 2006 and 2005 was approximately $19.3
million, $13.7 million and $9.1 million, respectively.
The Corporation primarily applies all payments received on non-accruing impaired loans to principal
until such time as the principal is paid off, after which time any additional payments received are
recognized as interest income. The Corporation recognized interest income of approximately $16.3
million, $15.7 million and $7.2 million on impaired performing loans in 2007, 2006 and 2005,
respectively. The Corporation recognized interest income of approximately $515,000, $644,000 and
$462,000 on impaired non-accrual loans in 2007, 2006 and 2005, respectively.
The Corporation has extended credit to the officers and directors of the Corporation and to their
associates. Related-party loans are made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with unrelated persons
and do not involve more than the normal risk of collectibility. The aggregate dollar amount of
these loans, including unadvanced commitments, was $303.0 million and $273.9 million at December
31, 2007 and 2006, respectively. During 2007, additions totaled $79.8 million and repayments
totaled $50.7 million.
The total portfolio of mortgage loans serviced by the Corporation for unrelated third parties was
$957.4 million and $981.4 million at December 31, 2007 and 2006, respectively.
NOTE E PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Land |
|
$ |
31,902 |
|
|
$ |
30,610 |
|
Buildings and improvements |
|
|
210,915 |
|
|
|
203,551 |
|
Furniture and equipment |
|
|
139,174 |
|
|
|
136,576 |
|
Construction in progress |
|
|
11,639 |
|
|
|
8,034 |
|
|
|
|
|
|
|
|
|
|
|
393,630 |
|
|
|
378,771 |
|
Less: Accumulated depreciation and amortization |
|
|
(200,334 |
) |
|
|
(187,370 |
) |
|
|
|
|
|
|
|
|
|
$ |
193,296 |
|
|
$ |
191,401 |
|
|
|
|
|
|
|
|
NOTE F GOODWILL AND INTANGIBLE ASSETS
The following table summarizes the changes in goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Balance at beginning of year |
|
$ |
626,042 |
|
|
$ |
418,735 |
|
|
$ |
364,019 |
|
Goodwill (reductions) additions |
|
|
(1,970 |
) |
|
|
207,307 |
|
|
|
54,716 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
624,072 |
|
|
$ |
626,042 |
|
|
$ |
418,735 |
|
|
|
|
|
|
|
|
|
|
|
The Corporation did not complete any acquisitions during the year ended December 31, 2007. The
decrease in goodwill in 2007 was primarily due to tax benefits realized on the exercise of options
assumed in acquisitions.
In 2006, the Corporation acquired Columbia Bancorp (Columbia) of Columbia, Maryland for a total
purchase price of $306.0 million. Columbia was a $1.3 billion bank holding company whose primary
subsidiary was The Columbia Bank. In 2005, the Corporation acquired SVB Financial Services, Inc.
(SVB) for a total purchase price of $90.4 million. SVB was a $530 million bank holding company
whose primary subsidiary was Somerset Valley Bank. The goodwill additions in 2006 and 2005,
respectively, resulted from these acquisitions.
65
The following table summarizes intangible assets at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Accumulated |
|
|
Impairment |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Gross |
|
|
Amortization |
|
|
Write-off |
|
|
Net |
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
|
|
(in thousands) |
|
Amortizing: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit |
|
$ |
50,279 |
|
|
$ |
(24,754 |
) |
|
$ |
|
|
|
$ |
25,525 |
|
|
$ |
50,279 |
|
|
$ |
(17,927 |
) |
|
$ |
32,352 |
|
Trade name |
|
|
797 |
|
|
|
(212 |
) |
|
|
(585 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unidentifiable
and other |
|
|
11,878 |
|
|
|
(7,830 |
) |
|
|
|
|
|
|
4,048 |
|
|
|
9,372 |
|
|
|
(6,535 |
) |
|
|
2,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizing |
|
|
62,954 |
|
|
|
(32,796 |
) |
|
|
(585 |
) |
|
|
29,573 |
|
|
|
59,651 |
|
|
|
(24,462 |
) |
|
|
35,189 |
|
Non-amortizing |
|
|
1,747 |
|
|
|
|
|
|
|
(484 |
) |
|
|
1,263 |
|
|
|
2,544 |
|
|
|
|
|
|
|
2,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
64,701 |
|
|
$ |
(32,796 |
) |
|
$ |
(1,069 |
) |
|
$ |
30,836 |
|
|
$ |
62,195 |
|
|
$ |
(24,462 |
) |
|
$ |
37,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangible assets are amortized using an accelerated method over the estimated
remaining life of the acquired core deposits. As of December 31, 2007, these assets had a weighted
average remaining life of approximately seven years. Unidentifiable intangible assets, consisting
of premiums paid on branch acquisitions which did not qualify for business combinations accounting
under Statement 141, had a weighted average life of six years. All remaining amortizing other
intangible assets had a weighted average life remaining of seven years. Amortization expense
related to intangible assets totaled $8.3 million, $7.9 million and $5.3 million in 2007, 2006 and
2005, respectively.
In 2007, the Corporation recorded $1.1 million of charges to other expense representing the balance
of impaired trade name intangibles for three subsidiary banks that consolidated, or are expected to
consolidate, with other subsidiary banks. See Note A, Summary of Significant Accounting Policies
for additional information related to these transactions.
Amortization expense for the next five years is expected to be as follows (in thousands):
|
|
|
|
|
Year |
|
|
|
|
2008 |
|
$ |
7,161 |
|
2009 |
|
|
5,741 |
|
2010 |
|
|
5,235 |
|
2011 |
|
|
4,239 |
|
2012 |
|
|
3,036 |
|
NOTE G MORTGAGE SERVICING RIGHTS
The following table summarizes the changes in mortgage servicing rights (MSRs), which are included
in other assets on the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Balance at beginning of year |
|
$ |
6,599 |
|
|
$ |
7,515 |
|
|
$ |
8,157 |
|
Originations of mortgage servicing rights |
|
|
1,099 |
|
|
|
724 |
|
|
|
1,548 |
|
Amortization expense |
|
|
(1,394 |
) |
|
|
(1,640 |
) |
|
|
(2,190 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
6,304 |
|
|
$ |
6,599 |
|
|
$ |
7,515 |
|
|
|
|
|
|
|
|
|
|
|
MSRs represent the economic value to be derived by the Corporation from its existing contractual
rights to service mortgage loans that have been sold. Accordingly, prepayments of the underlying
mortgage loan can impact the value of MSRs.
The Corporation estimates the fair value of its MSRs by discounting the estimated cash flows of
servicing revenue, net of costs, over the expected life of the underlying loans at a discount rate
commensurate with the risk associated with these assets. Expected life is based on the contractual
terms of the loans, as adjusted for prepayment projections for mortgage-backed securities with
rates and
66
terms comparable to the loans underlying the MSRs. The estimated fair value of MSRs was
approximately $7.8 million and $8.2 million at December 31, 2007 and 2006, respectively.
Estimated MSR amortization expense for the next five years, based on balances at December 31, 2007
and the expected remaining lives of the underlying loans, follows (in thousands):
|
|
|
|
|
Year |
|
|
|
|
2008 |
|
$ |
1,546 |
|
2009 |
|
|
1,377 |
|
2010 |
|
|
1,183 |
|
2011 |
|
|
961 |
|
2012 |
|
|
708 |
|
NOTE H DEPOSITS
Deposits consisted of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Noninterest-bearing demand |
|
$ |
1,722,211 |
|
|
$ |
1,831,419 |
|
Interest-bearing demand |
|
|
1,715,315 |
|
|
|
1,683,857 |
|
Savings and money market accounts |
|
|
2,131,374 |
|
|
|
2,287,146 |
|
Time deposits |
|
|
4,536,545 |
|
|
|
4,430,047 |
|
|
|
|
|
|
|
|
|
|
$ |
10,105,445 |
|
|
$ |
10,232,469 |
|
|
|
|
|
|
|
|
Included in time deposits were certificates of deposit equal to or greater than $100,000 of $1.4
billion and $1.2 billion at December 31, 2007 and 2006, respectively. The scheduled maturities of
time deposits as of December 31, 2007 are as follows (in thousands):
|
|
|
|
|
Year |
|
|
|
|
2008 |
|
$ |
3,732,333 |
|
2009 |
|
|
323,611 |
|
2010 |
|
|
149,015 |
|
2011 |
|
|
83,503 |
|
2012 |
|
|
54,715 |
|
Thereafter |
|
|
193,368 |
|
|
|
|
|
|
|
$ |
4,536,545 |
|
|
|
|
|
67
NOTE I SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings at December 31, 2007, 2006 and 2005 and the related maximum amounts
outstanding at the end of any month in each of the three years then ended are presented below. The
securities underlying the repurchase agreements remain in available for sale investment securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
Maximum Outstanding |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2007 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Federal funds purchased |
|
$ |
1,057,335 |
|
|
$ |
1,022,351 |
|
|
$ |
939,096 |
|
|
$ |
1,122,833 |
|
|
$ |
1,236,941 |
|
|
$ |
939,096 |
|
FHLB overnight repurchase agreements |
|
|
650,000 |
|
|
|
|
|
|
|
2,000 |
|
|
|
650,000 |
|
|
|
2,000 |
|
|
|
2,000 |
|
Securities
sold under agreements to repurchase |
|
|
228,061 |
|
|
|
339,207 |
|
|
|
352,937 |
|
|
|
286,342 |
|
|
|
498,541 |
|
|
|
573,991 |
|
Short-term promissory notes |
|
|
443,002 |
|
|
|
279,076 |
|
|
|
|
|
|
|
487,354 |
|
|
|
282,035 |
|
|
|
|
|
Revolving line of credit |
|
|
|
|
|
|
36,318 |
|
|
|
|
|
|
|
82,071 |
|
|
|
55,600 |
|
|
|
33,180 |
|
Other |
|
|
5,546 |
|
|
|
3,888 |
|
|
|
4,929 |
|
|
|
5,552 |
|
|
|
5,435 |
|
|
|
13,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,383,944 |
|
|
$ |
1,680,840 |
|
|
$ |
1,298,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents information related to securities sold under agreements to repurchase:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
2007 |
|
2006 |
|
2005 |
|
|
(dollars in thousands) |
Amount outstanding at December 31 |
|
$ |
878,061 |
|
|
$ |
339,207 |
|
|
$ |
354,937 |
|
Weighted average interest rate at year end |
|
|
1.41 |
% |
|
|
3.57 |
% |
|
|
2.61 |
% |
Average amount outstanding during the year |
|
$ |
337,690 |
|
|
$ |
356,561 |
|
|
$ |
436,244 |
|
Weighted average interest rate during the year |
|
|
3.67 |
% |
|
|
3.40 |
% |
|
|
2.12 |
% |
The Corporation has a $100.0 million revolving line of credit agreement with an unaffiliated bank
that provides for interest to be paid on outstanding balances at a floating rate of interest tied
to LIBOR. The credit agreement requires the Corporation to maintain certain financial ratios
related to capital strength and earnings. The Corporation was in compliance with all required
covenants under the credit agreement as of December 31, 2007.
Federal Home Loan Bank advances and long-term debt included the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Federal Home Loan Bank advances |
|
$ |
1,259,448 |
|
|
$ |
998,521 |
|
Junior subordinated deferrable interest debentures |
|
|
185,570 |
|
|
|
206,705 |
|
Subordinated debt |
|
|
200,000 |
|
|
|
100,000 |
|
Other long-term debt |
|
|
1,384 |
|
|
|
1,999 |
|
Unamortized issuance costs |
|
|
(4,269 |
) |
|
|
(3,077 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,642,133 |
|
|
$ |
1,304,148 |
|
|
|
|
|
|
|
|
Excluded from the preceding table is the Parent Companys revolving line of credit with its
subsidiary banks ($47.7 million and $75.0 million outstanding at December 31, 2007 and 2006,
respectively). This line of credit is secured by equity securities and insurance investments and
bears interest at the prime rate, minus 1.50%. Although the line of credit and related interest
have been eliminated in consolidation, this borrowing arrangement is senior to the subordinated
debt and the junior subordinated deferrable interest debentures.
Federal Home Loan Bank advances mature through March 2027 and carry a weighted average interest
rate of 4.90%. As of December 31, 2007, the Corporation had an additional borrowing capacity of
approximately $751.2 million with the Federal Home Loan Bank.
68
Advances from the Federal Home Loan Bank are secured by Federal Home Loan Bank stock, qualifying
residential mortgages, investments and other assets.
The following table summarizes the scheduled maturities of Federal Home Loan Bank advances and
long-term debt as of December 31, 2007 (in thousands):
|
|
|
|
|
Year |
|
|
|
|
2008 |
|
$ |
143,490 |
|
2009 |
|
|
199,013 |
|
2010 |
|
|
358,984 |
|
2011 |
|
|
25,372 |
|
2012 |
|
|
44,872 |
|
Thereafter |
|
|
870,402 |
|
|
|
|
|
|
|
$ |
1,642,133 |
|
|
|
|
|
In May 2007, the Corporation issued $100.0 million of ten-year subordinated notes, which mature on
May 1, 2017 and carry a fixed rate of 5.75% and an effective rate of approximately 5.96% as a
result of issuance costs. Interest is paid semi-annually in May and November of each year. In March
2005, the Corporation issued $100.0 million of ten-year subordinated notes, which mature April 1,
2015 and carry a fixed rate of 5.35% and an effective rate of approximately 5.49% as a result of
issuance costs. Interest is paid semi-annually in October and April of each year.
The Parent Company owns all of the common stock of six Subsidiary Trusts, which have issued Trust
Preferred Securities in conjunction with the Parent Company issuing junior subordinated deferrable
interest debentures to the trusts. The terms of the junior subordinated deferrable interest
debentures are the same as the terms of the Trust Preferred Securities. The Parent Companys
obligations under the debentures constitute a full and unconditional guarantee by the Parent
Company of the obligations of the trusts. The Trust Preferred Securities are redeemable on
specified dates, or earlier if the deduction of interest for Federal income taxes is prohibited,
the Trust Preferred Securities no longer qualify as Tier I regulatory capital, or if certain other
contingencies arise. The Trust Preferred Securities must be redeemed upon maturity. The following
table details the terms of the debentures (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate at |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed/ |
|
December 31, |
|
|
|
|
|
|
|
|
|
Callable |
Debentures Issued to |
|
Variable |
|
2007 |
|
Amount |
|
|
Maturity |
|
Callable |
|
Rate |
PBI Capital Trust |
|
Fixed |
|
8.57% |
|
$ |
10,310 |
|
|
8/15/2028 |
|
8/15/2008 |
|
104.3% |
SVB Eagle Statutory Trust I |
|
Variable |
|
8.26% |
|
|
4,124 |
|
|
7/31/2031 |
|
7/31/2011 |
|
100.0 |
Columbia Bancorp Statutory
Trust |
|
Variable |
|
7.48% |
|
|
6,186 |
|
|
6/30/2034 |
|
6/30/2009 |
|
100.0 |
Columbia Bancorp Statutory
Trust II |
|
Variable |
|
6.88% |
|
|
4,124 |
|
|
5/15/2035 |
|
5/15/2010 |
|
100.0 |
Columbia Bancorp Statutory
Trust III |
|
Variable |
|
6.76% |
|
|
6,186 |
|
|
6/15/2035 |
|
6/15/2010 |
|
100.0 |
Fulton Capital Trust I |
|
Fixed |
|
6.29% |
|
|
154,640 |
|
|
2/01/2036 |
|
NA |
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
185,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE J REGULATORY MATTERS
Dividend and Loan Limitations
The dividends that may be paid by subsidiary banks to the Parent Company are subject to certain
legal and regulatory limitations. Under such limitations, the total amount available for payment of
dividends by subsidiary banks was approximately $300 million at December 31, 2007.
Under current Federal Reserve regulations, the subsidiary banks are limited in the amount they may
loan to their affiliates, including the Parent Company. Loans to a single affiliate may not exceed
10%, and the aggregate of loans to all affiliates may not exceed 20%
69
of each bank subsidiarys regulatory capital. At December 31, 2007, the maximum amount available for transfer from the
subsidiary banks to the Parent Company in the form of loans and dividends was approximately $410
million.
Regulatory Capital Requirements
The Corporations subsidiary banks are subject to various regulatory capital requirements
administered by banking regulators. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Corporations financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, the
subsidiary banks must meet specific capital guidelines that involve quantitative measures of the
subsidiary banks assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The subsidiary banks capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy require the subsidiary
banks to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets,
and of Tier I capital to average assets (as defined in the regulations). Management believes, as of
December 31, 2007, that all of its bank subsidiaries meet the capital adequacy requirements to
which they are subject.
As of December 31, 2007, the Corporations six significant subsidiaries, Fulton Bank, Lafayette
Ambassador Bank, Resource Bank, Skylands Community Bank, The Bank and The Columbia Bank, were well
capitalized under the regulatory framework for prompt corrective action based on their capital
ratio calculations. As of December 31, 2006, the Corporations five significant subsidiaries,
Fulton Bank, Lafayette Ambassador Bank, Resource Bank, The Bank and The Columbia Bank, were also
well capitalized. To be categorized as well capitalized, these banks must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table.
There are no conditions or events since December 31, 2007 that management believes have changed the
institutions categories.
The following tables present the total risk-based, Tier I risk-based and Tier I leverage
requirements for the Corporation and its significant subsidiaries with total assets in excess of
$1.0 billion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Capital |
|
|
|
|
Actual |
|
Adequacy Purposes |
|
Well Capitalized |
As of December 31, 2007 |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
1,413,292 |
|
|
|
11.9 |
% |
|
$ |
948,845 |
|
|
|
8.0 |
% |
|
|
N/A |
|
|
|
|
|
Fulton Bank |
|
|
569,031 |
|
|
|
10.4 |
|
|
|
437,753 |
|
|
|
8.0 |
|
|
|
547,191 |
|
|
|
10.0 |
|
Lafayette Ambassador Bank |
|
|
121,446 |
|
|
|
11.8 |
|
|
|
82,522 |
|
|
|
8.0 |
|
|
|
103,153 |
|
|
|
10.0 |
|
Resource Bank |
|
|
113,146 |
|
|
|
10.7 |
|
|
|
84,274 |
|
|
|
8.0 |
|
|
|
105,342 |
|
|
|
10.0 |
|
Skylands Community Bank |
|
|
96,726 |
|
|
|
10.7 |
|
|
|
72,096 |
|
|
|
8.0 |
|
|
|
90,120 |
|
|
|
10.0 |
|
The Bank |
|
|
160,951 |
|
|
|
11.0 |
|
|
|
117,178 |
|
|
|
8.0 |
|
|
|
146,473 |
|
|
|
10.0 |
|
The Columbia Bank |
|
|
152,892 |
|
|
|
12.0 |
|
|
|
101,587 |
|
|
|
8.0 |
|
|
|
126,984 |
|
|
|
10.0 |
|
Tier I Capital (to Risk-Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
1,101,083 |
|
|
|
9.3 |
% |
|
$ |
474,422 |
|
|
|
4.0 |
% |
|
|
N/A |
|
|
|
|
|
Fulton Bank |
|
|
465,479 |
|
|
|
8.5 |
|
|
|
218,876 |
|
|
|
4.0 |
|
|
|
328,315 |
|
|
|
6.0 |
|
Lafayette Ambassador Bank |
|
|
104,446 |
|
|
|
10.1 |
|
|
|
41,261 |
|
|
|
4.0 |
|
|
|
61,892 |
|
|
|
6.0 |
|
Resource Bank |
|
|
93,364 |
|
|
|
8.9 |
|
|
|
42,137 |
|
|
|
4.0 |
|
|
|
63,205 |
|
|
|
6.0 |
|
Skylands Community Bank |
|
|
82,840 |
|
|
|
9.2 |
|
|
|
36,048 |
|
|
|
4.0 |
|
|
|
54,072 |
|
|
|
6.0 |
|
The Bank |
|
|
132,681 |
|
|
|
9.1 |
|
|
|
58,589 |
|
|
|
4.0 |
|
|
|
87,884 |
|
|
|
6.0 |
|
The Columbia Bank |
|
|
137,979 |
|
|
|
10.9 |
|
|
|
50,794 |
|
|
|
4.0 |
|
|
|
76,191 |
|
|
|
6.0 |
|
Tier I Capital (to Average Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
1,101,083 |
|
|
|
7.4 |
% |
|
$ |
447,114 |
|
|
|
3.0 |
% |
|
|
N/A |
|
|
|
|
|
Fulton Bank |
|
|
465,479 |
|
|
|
6.8 |
|
|
|
205,019 |
|
|
|
3.0 |
|
|
|
341,698 |
|
|
|
5.0 |
|
Lafayette Ambassador Bank |
|
|
104,446 |
|
|
|
7.7 |
|
|
|
40,471 |
|
|
|
3.0 |
|
|
|
67,452 |
|
|
|
5.0 |
|
Resource Bank |
|
|
93,364 |
|
|
|
6.9 |
|
|
|
40,440 |
|
|
|
3.0 |
|
|
|
67,400 |
|
|
|
5.0 |
|
Skylands Community Bank |
|
|
82,840 |
|
|
|
7.2 |
|
|
|
34,512 |
|
|
|
3.0 |
|
|
|
57,520 |
|
|
|
5.0 |
|
The Bank |
|
|
132,681 |
|
|
|
7.3 |
|
|
|
54,809 |
|
|
|
3.0 |
|
|
|
91,349 |
|
|
|
5.0 |
|
The Columbia Bank |
|
|
137,979 |
|
|
|
9.0 |
|
|
|
46,009 |
|
|
|
3.0 |
|
|
|
76,682 |
|
|
|
5.0 |
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Capital |
|
|
|
|
Actual |
|
Adequacy Purposes |
|
Well Capitalized |
As of December 31, 2006 |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
1,287,443 |
|
|
|
11.7 |
% |
|
$ |
880,074 |
|
|
|
8.0 |
% |
|
|
N/A |
|
|
|
|
|
Fulton Bank |
|
|
496,555 |
|
|
|
11.2 |
|
|
|
356,238 |
|
|
|
8.0 |
|
|
|
445,297 |
|
|
|
10.0 |
|
Lafayette Ambassador Bank |
|
|
107,102 |
|
|
|
10.7 |
|
|
|
80,069 |
|
|
|
8.0 |
|
|
|
100,086 |
|
|
|
10.0 |
|
Resource Bank |
|
|
107,459 |
|
|
|
11.2 |
|
|
|
76,921 |
|
|
|
8.0 |
|
|
|
96,151 |
|
|
|
10.0 |
|
The Bank |
|
|
119,237 |
|
|
|
11.4 |
|
|
|
83,679 |
|
|
|
8.0 |
|
|
|
104,599 |
|
|
|
10.0 |
|
The Columbia Bank |
|
|
147,565 |
|
|
|
11.9 |
|
|
|
99,272 |
|
|
|
8.0 |
|
|
|
124,090 |
|
|
|
10.0 |
|
Tier I Capital (to Risk-Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
1,080,559 |
|
|
|
9.8 |
% |
|
$ |
440,037 |
|
|
|
4.0 |
% |
|
|
N/A |
|
|
|
|
|
Fulton Bank |
|
|
401,584 |
|
|
|
9.0 |
|
|
|
178,119 |
|
|
|
4.0 |
|
|
|
267,178 |
|
|
|
6.0 |
|
Lafayette Ambassador Bank |
|
|
90,332 |
|
|
|
9.0 |
|
|
|
40,035 |
|
|
|
4.0 |
|
|
|
60,052 |
|
|
|
6.0 |
|
Resource Bank |
|
|
89,215 |
|
|
|
9.3 |
|
|
|
38,460 |
|
|
|
4.0 |
|
|
|
57,691 |
|
|
|
6.0 |
|
The Bank |
|
|
96,821 |
|
|
|
9.3 |
|
|
|
41,840 |
|
|
|
4.0 |
|
|
|
62,759 |
|
|
|
6.0 |
|
The Columbia Bank |
|
|
134,167 |
|
|
|
10.8 |
|
|
|
49,636 |
|
|
|
4.0 |
|
|
|
74,454 |
|
|
|
6.0 |
|
Tier I Capital (to Average Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
1,080,559 |
|
|
|
7.6 |
% |
|
$ |
425,125 |
|
|
|
3.0 |
% |
|
|
N/A |
|
|
|
|
|
Fulton Bank |
|
|
401,584 |
|
|
|
7.1 |
|
|
|
168,974 |
|
|
|
3.0 |
|
|
|
281,624 |
|
|
|
5.0 |
|
Lafayette Ambassador Bank |
|
|
90,332 |
|
|
|
7.0 |
|
|
|
38,942 |
|
|
|
3.0 |
|
|
|
64,904 |
|
|
|
5.0 |
|
Resource Bank |
|
|
89,215 |
|
|
|
7.0 |
|
|
|
38,209 |
|
|
|
3.0 |
|
|
|
63,681 |
|
|
|
5.0 |
|
The Bank |
|
|
96,821 |
|
|
|
7.5 |
|
|
|
38,821 |
|
|
|
3.0 |
|
|
|
64,701 |
|
|
|
5.0 |
|
The Columbia Bank |
|
|
134,167 |
|
|
|
9.2 |
|
|
|
43,573 |
|
|
|
3.0 |
|
|
|
72,622 |
|
|
|
5.0 |
|
NOTE
K INCOME TAXES
The components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Current tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
75,855 |
|
|
$ |
85,010 |
|
|
$ |
69,611 |
|
State |
|
|
1,323 |
|
|
|
1,191 |
|
|
|
760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,178 |
|
|
|
86,201 |
|
|
|
70,371 |
|
Deferred tax (benefit) expense |
|
|
(13,646 |
) |
|
|
(5,779 |
) |
|
|
990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
63,532 |
|
|
$ |
80,422 |
|
|
$ |
71,361 |
|
|
|
|
|
|
|
|
|
|
|
The differences between the effective income tax rate and the Federal statutory income tax rate are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Statutory tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Effect of tax-exempt income |
|
|
(4.4 |
) |
|
|
(3.1 |
) |
|
|
(2.8 |
) |
Effect of low income housing investments |
|
|
(1.7 |
) |
|
|
(1.5 |
) |
|
|
(2.1 |
) |
State income taxes, net of Federal benefit |
|
|
0.4 |
|
|
|
0.3 |
|
|
|
0.2 |
|
Bank-owned life insurance |
|
|
(0.5 |
) |
|
|
(0.4 |
) |
|
|
(0.3 |
) |
Other, net |
|
|
0.6 |
|
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
29.4 |
% |
|
|
30.2 |
% |
|
|
30.1 |
% |
|
|
|
|
|
|
|
|
|
|
71
The net deferred tax asset recorded by the Corporation is included in other assets and consists of
the following tax effects of temporary differences at December 31:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
39,273 |
|
|
$ |
37,409 |
|
Loss and credit carryforwards |
|
|
7,221 |
|
|
|
11,111 |
|
Unrealized holding losses on securities available for sale |
|
|
10,480 |
|
|
|
14,432 |
|
Other accrued expenses |
|
|
10,226 |
|
|
|
2,594 |
|
Deferred compensation |
|
|
9,407 |
|
|
|
8,954 |
|
LIH Investments |
|
|
4,251 |
|
|
|
3,644 |
|
Stock-based compensation |
|
|
2,085 |
|
|
|
1,930 |
|
Derivative financial instruments |
|
|
1,789 |
|
|
|
1,868 |
|
Postretirement and defined benefit plans |
|
|
1,570 |
|
|
|
5,370 |
|
Premises and equipment |
|
|
1,125 |
|
|
|
1,059 |
|
Other |
|
|
3,515 |
|
|
|
743 |
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
90,942 |
|
|
|
89,114 |
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Intangible assets |
|
|
7,846 |
|
|
|
10,368 |
|
Direct leasing |
|
|
5,556 |
|
|
|
5,007 |
|
Acquisition premiums/discounts |
|
|
2,961 |
|
|
|
983 |
|
Mortgage servicing rights |
|
|
2,206 |
|
|
|
2,315 |
|
Other |
|
|
1,083 |
|
|
|
2,700 |
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities |
|
|
19,652 |
|
|
|
21,373 |
|
|
|
|
|
|
|
|
|
Net deferred tax asset before valuation allowance |
|
|
71,290 |
|
|
|
67,741 |
|
Valuation allowance |
|
|
(7,197 |
) |
|
|
(11,087 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
64,093 |
|
|
$ |
56,654 |
|
|
|
|
|
|
<